These five words ‘spend less than you earn’ are the foundation of financial success.
Just as personal trainers encourage people to consume less calories than they burn, money experts highlight consistent overspending as the single biggest threat to your financial wellbeing. Simply put, if you want to solve your money problems, spend less than you earn.
Before going further into this, I want to point out that it’s not in everyone’s gift to simply cut their spending back, especially if they are struggling to make ends meet. It’s also not my business to tell people not to spend their money on whatever they choose – personal finance is personal and people can make their own choices.
But if you are interested in building long-term wealth and reaching financial independence, the sooner you can bring your monthly spending below your monthly earning, the better. Here’s how:
1 – Work out if you are overspending
If you don’t have one already, you need to create a budget to record what you earn each month and what you spend your money on.
Only by capturing all your expenses, toting them up and comparing the total to your income, can you see if you spend more or less than you earn.
Generally we have cost of living expenses that repeat each month (gas, electricity, rent and all that jazz) and we have what’s called ‘discretionary’ expenses for things like hobbies, drinkies, fancy new outfits and those expensive coffees that people tell you not to buy – but you know, you buy at your own discretion!
Basically every monthly expense you spend a penny on needs to be subtracted from the total amount you earn each month.
Rinse and repeat this exercise for at least three months of bank transaction to try and get a bit of an average. Obviously the more months the better, but there is a point of diminishing returns, so don’t go overboard.
2 – Find places to cut costs
Hopefully you finish the month with a little bit of cash left over i.e. on average you spend less than you earn. Economists call this a ‘surplus’. Business people call it a ‘profit’. Personal finance wonks (like me) refer to it as your ‘savings rate’, particularly if you take that left over money and use it to pay down debts or invest it into an ISA.
Anyway, the aim is to create a savings rate (to spend less than you earn) and then continue to grow it. The fastest way to do this is to review your expenses and see which ones you can reduce or live without i.e. be more frugal. If you need help with this, the king of consumer finance has a useful guide on spending less.
Challenge yourself each month to either reduce or remove one expense from your budget and keep going until you are living a monastic lifestyle and have run out of different recipes for beans on toast!
Obviously there is a sensible balance to achieved between extreme frugality and enjoying life, but keeping an eye on the pennies does help with the ongoing challenge of ‘lifestyle inflation’, which once you’ve had children is a bit like trying to stop a leaking dam by sticking your finger in the hole – and finding that as soon as you’ve plugged that hole, another leak appears from nowhere!
3 – Find ways to increase your income
A longer-term approach to improve your savings rate is to grow your income. This might be through a promotion at work, launching some kind of sideline business, taking on extra gig work or marrying someone with a lot of money (obviously that last one was a joke, a pretty lame joke I agree….).
Pay down debts, save and invest
So that’s it really. Spend less than you earn, find ways to grow your savings rate, use the spare cash to pay down your debts and then save and invest it for the future. How hard can it all be…?
Thanks for reading 🙂