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Orman’s game-changing rule

Orman suggests that anyone looking to build financial security should “buy what you need versus what you can afford when you can afford more than you need.” In other words, her top advice was to live below your means.

As an example, Orman said she could technically have afforded an apartment that was much more expensive than the one she actually has. But by purchasing property below her budget, she created a monetary buffer that added to her sense of financial stability over the long run.

Orman isn’t the only successful entrepreneur who lives by this rule. Warren Buffett famously still lives in the home he purchased for just $31,000 in 1958.

IKEA’s founder, the late Ingvar Kamprad, bought clothes at flea markets even after he became a billionaire. Mark Zuckerberg’s car collection is limited to mundane models such as a Honda Fit, Acura TSX sedan, and a Volkswagen Golf GTI hatchback.

These multibillionaires could afford to buy fancier cars, mega-mansions, or high-tech luxury gadgets, but insisted on buying only what they needed. Maintaining that gap between needs and wants is a critical part of their wealth-building strategy.

Unfortunately, many Americans struggle to exercise similar restraint.

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America’s overconsumption issue

Most Americans seem to break (or ignore) Orman’s golden rule. Instead of buying less than they can afford, the average consumer tends to buy far more than they can afford.

According to a Lending Tree study, more than 18 million American homeowners are considered “house poor” — spending more than 30% of their monthly income on housing costs.

Similarly, a report by Market Watch found that 82% of Americans struggle to keep the monthly cost of car ownership below the recommended threshold of 10% of their monthly income.

Even households with relatively good incomes are stretching themselves thin. Nearly half (42%) of consumers earning more than $100,000 a year were living paycheck to paycheck, according to a 2023 PYMNTS Intelligence survey.

Many have found themselves in debt as they struggle to bridge the gap between what they can afford and what they want to purchase (but don’t actually need).

Total household debt surged to a record high $17.69 trillion in the first quarter of 2024, according to the Federal Reserve’s Household Debt and Credit Report. Credit card and auto loans have been rising alongside mortgage debt in recent quarters.

This has put many American families in a precarious position. However, Orman believes her golden rule could help some of these families get back on track.

“How do you start to live by that rule?” she asked during the live presentation. “From this day forward, I would like you to make a vow to yourself that, for the next six months… only buy needs, not wants.”

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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