The Motley Fool

This 1 factor will be key to securing your financial future

There are few factors that affect your personal finances as much as a select few things.

How much you earn is very important, but I think spending less than you earn is the most important factor of all.

As one of the most simple examples, if you earn $20 after tax and spend $19 then you’re setting yourself up for a good life. If you spend $21 then you’re headed for financial ruin eventually.

Every financial decision we make affects all of our money for the future. If we invest in shares like the iShares S&P 500 ETF (ASX: IVV) and hold them forever they will always be growing over the long-term and paying dividends for us. If we decide to buy something using Afterpay Touch Group Ltd (ASX: APT) or a loan it hurts our monthly cashflow until it’s paid off.

In a low inflation environment we can’t expect our earnings to grow quickly and eat away at the loan balance as it has in the past. Saving will be key in my opinion.

The key to getting ahead could be saving more money, or spending less than you earn.

Obviously you have to pay for the basics, but then I think it’s important to make a decision about what’s more important: saving some money for your future or maintaining your expenditure for your happiness.

If you increase your expenditure at the same pace as your income then you’re falling for ‘lifestyle inflation’. You may well be having a great life but you won’t be getting ahead financially.

It doesn’t matter whether you earn $100,000 or $1,000,000 a year, it matters how much you save each month to put towards your future wealth. If you always spend everything then you’ll never get ahead.

Foolish takeaway

I firmly believe that the most important thing for our future wealth that we can affect is how much we save. We can’t do too much to adjust returns, but you can’t go wrong if you are spending less than you earn as long as debt isn’t a factor.

Once you’ve got your savings down you can put money towards top-quality ASX shares like these.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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