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How to Make the Most of Your Money

"Don't buy stuff you can't afford."

That was the punch line to a Saturday Night Livefaux infomercial about how Americans can get out of debt. And it's good advice. But the idea, perplexing in its simplicity, was confusing to the folks in the skit:

Wife: Well what if you have the money, can you buy something?
Advisor: Yes.
Wife: Now take the money away. Same story?
Advisor: Nope. You shouldn't buy stuff when you don't have the money.
Husband: I think I got it. I buy something I want, and then I hope I can pay for it, right?
Advisor: No. You make sure you have the money, then you buy it.
Husband: Oh, then you buy it.

This made us laugh hysterically.

And then it hit us
Sadly, we were laughing because this is true -- and because we know people just like the folks in the skit.

According to the Federal Reserve, in 2004, 46% of American families were strapped with credit card debt. How much debt? $5,100 on average, as our Foolish colleague Nathan Alderman pointed out. And that's just credit cards.

Factor in student loans, car loans, home-equity lines of credit, mortgages, second mortgages, vacation-home mortgages ... yup, our nation is in debt's unforgiving clenches.

And then there's the Department of Commerce's frightening personal savings rate stat -- zero -- the lowest since the Great Depression.

Seriously, don't buy stuff you can't afford
Of course, these stats aren't the whole truth. The Department of Commerce, for example, doesn't consider capital gains as savings. That's unfortunate. But the studies do reveal an America that isn't by any means fiscally sound.

The simple message of the SNL skit is certainly one way to reduce debt, increase savings, and help boost those gloomy stats. Yet there's more to fiscal health than Spartan self-deprivation. For instance, if you can't technically "afford" food because you already have credit card debt, by all means, pick up some groceries.

Get out of debt
However, if you are in credit card debt, it's absolutely crucial that you develop a plan now to pay it off and get your bank account going in the right direction (up). And beyond that, it's important to make sure you save -- and eventually invest -- for the future.

How can you accomplish this? Here are three simple steps:

  1. Take stock of your entire financial life. What do you have? What don't you have? What do you need, beyond just your bank account? Tally up your liabilities and your assets.
  2. Figure out what you earn each month, what you spend on absolute necessities, and where you can find savings. Every dollar counts.
  3. Use your savings to start paying down debt (highest-interest debt first) or, if you have no debt (congratulations!), contribute the maximum amount to a retirement plan. If there's money left over after that, split it up between more savings and a few luxuries.

Those three steps will help you keep your financial head above water. That's a huge step for most Americans, but you shouldn't stop there.

The key to building a financial dynasty -- where you have all the resources you want for a new home, retirement, your daughter's college tuition, or a French Polynesian vacation -- is to invest.

Get going today
That's easier said than done, however. There are a significant number of people who visit our website unsure of how to get started investing. Indeed, "What do I do first?" is the question we field most on our discussion boards.

And we're glad to answer it because it's an important question -- probably the most important question of all. Because once you get over the hump and get started regularly saving and investing, you'll find that your financial security almost takes care of itself.

Our country will be better off when every American is able to take control of his or her financial destiny. And because the stock market has the power to turn a few hundred dollars of savings each month into a pretty tidy nest egg.

The global economy ... working for you
Don't believe us? In the inaugural issue of Motley Fool GreenLight, Foolish advisors Shannon Zimmerman and Dayana Yochim show how you can double your money in just 10 years simply by earning the market's historical rate of return. They also show you how you can do even better by putting your cash in the right investment vehicles.

And remember the sad savings rate we mentioned above? That was just for individuals. Publicly traded corporations actually have more cash on hand today than ever before. BerkshireHathaway (NYSE: BRKb  ) , Johnson & Johnson (NYSE: JNJ  ) , Chevron (NYSE: CVX  ) , Wal-Mart (NYSE: WMT  ) , and Sears Holdings (Nasdaq: SHLD  ) are just a few of the firms that are swimming like Scrooge McDuck in vaults of money.

What does that mean for you? Well, those companies have to do something with all that cash eventually, either by paying it out to shareholders in the form of dividends or investing it at a high rate of return. Either way, you can piggyback on their corporate wealth.

The Foolish bottom line
Like the SNL skit we opened with, "Don't buy stuff you can't afford" is a maxim perplexing in its simplicity. And there are gobs of other money issues -- from which discount broker is the best to oft-overlooked tax deductions -- that are much more complicated.

So if you need help wading through the muddy waters of money management, consider joining GreenLight. The service promises to help you find more money in your paycheck and earn better returns on your savings. And don't worry if you can't afford it -- click here to preview it free for 30 days.

This article was originally published on July 13, 2006. It has been updated.

Tim Hanson and Brian Richards think that if you laughed at "Don't Buy Stuff You Can't Afford," you're already smarter than most. Tim and Brian don't own shares of any company mentioned. Wal-Mart is an Inside Value pick. Johnson & Johnson is an Income Investor pick. The Fool'sdisclosure policyrocks its bad self.


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