Thursday, January 17, 2008

Spend Less than you Earn

This is quite possibly the simplest money rule of all. Unfortunately, most people don't understand this, or just plain ignore it.

There is nothing hard about this rule. Your total expenses have to be less than your total income. For example, if you make $3,000 a month, you should not be spending $5,000 a month. The goal is to build wealth, not go into debt.

People who don't follow this rule generally fall into one of these categories:
  • They don't live beneath their means
  • They have no idea how much they are actually spending
Live beneath your means
This is an easy fix. Stop paying for things you don't need. If you can't find any spare money to save, and always end up deeper and deeper in debt every month, then you aren't living beneath your means. 

The key is to identify the difference between wants and needs. You want a new car, but you don't need it. You want a large house, but you don't need it. You want to eat out every night, but you don't need to. Cut back on things you want but don't truly need, and you can begin to live beneath your means. If you can't seem to do this because your rent and car payments are too high, then you need to sell your car and move to a smaller place. 

Look around you and reevaluate some of your purchases. For example, if you have 100+ DVDs and a 50+ inch HDTV, yet are going deeper into debt each month, then you aren't living beneath your means. Make some life changes, and start spending less than you earn.

Tracking your spending
If you don't track what you spend money on, then it is very easy to spend more than you earn. In the past, you would have to keep receipts or a written record of all your purchases. Now, everything is electronic and online. There is no excuse to not know where all your money goes. All major credit card companies and banks have an online account where you can track all your purchases.

If you have multiple credit cards, debit cards, and checking accounts, then you can use an all in one service like Mint. This site tracks your spending for you. Being lazy isn't even an excuse to not track your spending now. When you see in a pie chart that entertainment makes up half of your expenses for example, you can start to target your spending according. 

If you start living beneath your means, and track all your spending, you will be on your way to spending less than you earn. Only then can you start putting your money to work for you to build wealth.

1 comment:

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