Get Rich Slowly By Spending Less Than You Earn
Spend Less Than You Earn
This is the third of a fourteen-part series that explores the core tenets of Get Rich Slowly.
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Charles Dickens, David Copperfield
When people ask me for my most valuable tip on personal finance, they’re often disappointed because my number one tip isn’t a very sexy one. “To get out of debt and to build wealth,” I say, “you must spend less than you earn.” People are hoping for something more, some sort of mystical or magical secret. Guess what? As mundane as it sounds, that is the mystical secret of money. I will add a variable of personality discipline, what do I mean by this? When I first began my business I felt as though I was the only one who could clean, organize and file according to my standards so the result of this was I wasn’t placing my energy where I excel best thus hence slowing financial growth so even though I couldn’t afford a maid, accountant or assistant I hired all three placing the only option as success because I had to pay them resulting in over all success because I was now putting all of my focus in my business and I learned to delegate for productive leverage freeing up my “green time” for income producing activities which also gave me time freedom to enjoy sharing quality time with my daughter.
If you want to get out of debt and build wealth, all you ever need to do is spend less than you earn. Everything else we talk about at Get Rich Slowly is window dressing, a prop in support of the fundamental equation of personal finance:
WEALTH = WHAT YOU EARN – WHAT YOU SPEND
The wider the gap between what you earn and what you spend, the more financial success you’ll achieve.
This simple formula has a couple of implications. The first is that being frugal can have a very real impact on your financial situation. Frugality is an important part of personal finance because when you decrease your expenses, your cash flow has only one option and that is to increase. If you’re living paycheck to pawnshop to finance company and repeating the process because you have more month than money then you will appreciate what I have to say here. On a $3000 a month income, reducing your monthly expenses by $300 can give you substantial breathing room. (See the Charles Dickens quote at the beginning of this article.)
The big advantage of thrift is that you can implement it immediately. In theory, if there were no psychological factors and we all know there are because all decisions are made by emotions, once you learn to master your emotions you will be in control of your future which means it is then you will live life on your terms (conquer your mind because where the mind goes the body will follow), you could cut your expenses in half today and your savings would skyrocket. Making frugal decisions and altering your spending behavior by shopping at consignment shops and goodwill instead of Dillard’s or Macy’s, conserving by eating out less and preparing leftovers or even going on a ramen noodle budget pays immediate dividends.
The disadvantage of frugality is that there’s a limit to what you can do. You can only trim so much from your budget before you become miserable or until you don’t have enough for food and shelter. If you earn $3000 a month, you only have $3000 total you can cut. At $3000 monthly income, your maximum positive cash flow is $3000.
Thrift has limits. You cannot spend less than zero. On the other hand, there is theoretically no limit to how much money you can earn. Frugality is important, but if you want to make real progress, increase your income.
In the 4 1/2 years I’ve been running this site, I feel like I’ve never been able to make this point emphatically enough. The people I know who have met with wild financial success have all done so by increasing their income in some way. They’ve all had to make sacrifices to do this, but once they’ve met their goals, they’re able to scale back to a normal way of life. If you want to destroy your debt not just defeat it, but destroy really it do something to boost your income. How do you earn more money?
Work longer hours.
Get a second job.
Start a small business.
Sell the stuff you have.
All of these options will work and yes, they all require sacrifices, especially the sacrifice of time. Most people feel that these options aren’t right for them. If that’s the case, if you’ve already cut your spending to the bone and you’re unable to earn more then there’s really no answer other than extreme frugality and patience.
There are no silver bullets. There’s no magical way to change the fundamental equation of personal finance: To build wealth, you must spend less than you earn. If a person has already cut her/his spending to the bone and is unable to increase her/his income, she/he will continue to struggle.
Three Financial Formulas You Need toKnow and Understand
If you can remember and understand the following three financial formulas, you’ll be well on your way to building wealth. They’re not complicated, they’re not fancy, but they will put you ahead of 90% of the population. Well, I don’t really know that 90% figure is true, but it sure seems that way!
Formula One: The Debt Formula
In simple terms, 2 – 3 = DEBT. If you spend more money (represented by the 3 piles of money) than you earn (represented by the 2 piles of money), you will go into debt. There is no way around it. Spending even one dollar more than you earn is bound to lead to financial destruction if carried out over a long enough period of time.
Formula Two: The Broke Formula
Once again in simple terms, 2 – 2 = BROKE. If you spend every penny you make, you will be broke. There is no way around it. You will be living paycheck-to-paycheck until you can break the cycle and begin following Formula Three.
Formula Three: The Wealth Formula
OK, this one is a little more complicated, so pay attention! 2 – 1 =SAVINGS. If you spend less than you earn, you’ll have money left over to save. If you take that savings and invest it, you get WEALTH. How do you invest it? There are numerous ways, but here are a few:
Pay off debt! at some point debt will become your friend and it will be needed for your taxes, for now let’s just get rid of it.
Invest in yourself and always pay yourself! (Education & Training)
Invest in the Stock Market! (In a low-cost, tax-efficient, diversified portfolio)
Invest in Real Estate! (People will always need a place to live and businesses always need a storefront!)
Invest in a Money Market account, CD’s, etc. for a sleep at night factor
Start a Business! (Probably the best option if you have entrepreneurial skills and a good business idea)
Take the profits and create a dream bucket for your wants and desires with the knowledge that you can only buy what you can afford from the money in your dream bucket.
That’s All the Math You Need!
Well, there is one other formula you’ll need to understand, compound interest. We’ll talk about that later though. For now, just figure out how you can start following The Wealth Formula if you’re not already. Oh, and don’t spend any more time trying to figure out other financial formulas just yet. This will be all you need for a while!
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