1. Live on less than you make

This may seem like basic common sense and an old cliché, but the fact is most people do not follow this most basic principle. Most people live paycheck to paycheck and have all their income (and sometimes more) committed to things like debt payments and lifestyle choices. The first step in creating a solid financial foundation is to have some MARGIN with your money. Your family is not a government that prints money whenever it needs more.

The more margin you have in your life financially, the more flexibility you have to make choices. Too many people stay at a job they hate or can’t move to where they want or go back to school because they don’t have enough financial cushion to make life changes like these. Furthermore, if you always have room in your budget every month, then suddenly unexpected expenses like a car repair or a medical bill are an inconvenience instead of a full-blown financial emergency.

2. Get out of debt and stay out of debt

This is the biggest reason why most people can’t live on less than they make. Debt payments sap away your income every money in the form of payments. You’ll hear me quote my favorite money guru Dave Ramsey a lot, and he is without a doubt the king of helping people getting out of debt. He likes to say, “Your most powerful wealth-building tool is your income. It’s very difficult to build wealth when all the money comes in, all the money goes out, and only the name are changed to protect the innocent!”

Debt has become so normalized in our culture today that many think it’s not a big deal to have a bunch of debt, and it’s always going to be there. Wrong! Being in debt is a big deal. It added incredible risk to your live and robs you of your ability to save for a comfortable retirement and give to others in need. Focus on your debt and knock it out as fast as you can!

3. Save for for the short-term and the long term

Short-term savings mean building an emergency fund of 3-6 months of household expenses. This is enough to cover just about anything unexpected life throws at you: job loss, medical problem, car break-down, etc. Until you’re out of debt except for your mortgage however, just save about 1-2k as a starter emergency fund. This will help keep most minor emergencies at bay while you work your way out of debt.

Once you’re out of debt and have 3-6 months in the bank, start investing 15% of your income in whatever retirement accounts you have available. An employer 401k match at work is the best option, followed by a Roth IRA and then a non-matching 401k or 403b. Invest in diversified mutual funds in these accounts (no bonds, annuities or single stocks). I’ll do other articles that cover investments in much greater detail. For now if you’re not sure what anything means, just invest in an S&P 500 index fund and you’ll be fine for now.

4. Protect your assets with insurance

Insurance is all about transferring risk. You buy insurance on something so you can be financially compensated if that thing is damaged or destroyed. Insurance is usually only worth the expense if you cannot self-insure the item yourself, meaning it doesn’t cripple you financially if you have to repair or replace the item out-of-pocket.

Everyone needs health insurance. Period. Medical bills are the number one cause of personal bankruptcy in the US, and much of that is a result of being uninsured or under-insured. Often young, healthy people say they don’t need health insurance because they almost never get sick. They miss the point that any insurance is primarily about protecting you against MAJOR financial loss. You can recover from a $5,000 out-of-pocket medical expense, but a $200,000 cancer scare or life-threatening injury can bankrupt you.

Every car owner needs comprehensive car insurance (required by law in most cases). Every renter needs renters insurance and every homeowner needs homeowners insurance. Every adult who works needs long-term disability insurance, even if can only cover part of the lost income if the become permanently disabled. Every adult who is married or has children needs 10-12 times their income of level term life insurance. This will effectively replace your income if you die for those who depend on it.

5. Give generously

Money is not all about spending and saving. Giving is an equally important part of your financial world. The more wealth you build, the more you can help others in need. It enriches your spirit and in many ways is most fun you’ll ever have with money. At some point, living even the most lavish lifestyle ceases to be fun, but generosity never gets old.