If there is a single mantra of The Simple Dollar, it’s this one.
Spend less than you earn.
There’s a reason that it’s my first rule of personal finance.
If you can spend less than you earn consistently over various time frames (less this week, less this month, less this year all at the same time), you’re going to be in great financial shape.
It all starts with spending. Do you have your spending under control?
Spending less than you earn means one thing above all else: being in control of yourself.
Are you able to control yourself when there’s a temptation in front of you? Are you able to control yourself when a friend begs you to go out shopping and spending money you don’t really have? Are you able to control your desire to go on an expensive trip when you don’t have your financial house in order? Are you able to control your feelings of want when you see that nice shiny new car at the dealership with all of those great features?
Most importantly, are you able to control these feelings consistently? Can you do it over and over and over again?
Spending less is about self-control, nothing more, nothing less.
Of course, that’s not to say there aren’t tactics that can’t help you down that path.
Start by channeling your excess money into a small emergency fund. Set a goal of having $1,000 in your savings account and get there as fast as you can. Move money from your checking account into your savings with each and every good decision you make. That emergency fund will be there for you when things like a car breakdown or a job loss happens.
After that, get rid of the credit cards. Cutting them up is a pretty good first step to help ensure self-control. Make minimum payments on all of your debts, then try to make a double or triple payment on the debt that has the highest interest rate. Repeat that, month after month, and you’ll see your debts shrinking instead of growing.
If you can achieve those two steps, you’re going to be well on your way down the path to financial success. You will be debt free and be making far more than you bring in per month. Saving for retirement will be easy, as will saving for a house down payment.
Of course, there is another side to all of this.
… than you earn
When people hear the phrase “spend less than you earn,” the focus is almost always on the “reduce spending” side of the equation.
Equally important is the “increase earning” side of the equation. If you make more money and leave your spending unchanged, you’ll immediately move from living paycheck to paycheck to spending less than you earn. If you are struggling financially and can’t seem to find a way to get a grip on your situation, the best move is to find a burst of short-term income.
One easy first step is to clean out your closet and sell off the unwanted stuff.Sell your unwanted DVDs and Blurays on eBay. Have a giant yard sale. Take all of your still-in-good-shape clothes to a local consignment shop. Get rid of all of those old collections that you no longer look at. This will generate some short term cash that you can quickly apply to an emergency fund or to your highest interest debt, as described above.
Another step is to earn a bit of extra money when you’re idle. If you’re sitting on the couch watching television, fire up a computer and do things like Mechanical Turk to earn a few dollars. Put that money straight toward your debts. You can also try something more ambitious, like starting a small side business or even working a part-time job. Apply all of that money toward improving your financial situation.
The thing to remember is that self-control is the factor that underlines all of this. For any of this to work, you have to be willing to sometimes say no to temptations and to let go to some of the non-essential luxuries. If you’re not willing to do that, then you’re not going to turn your financial life around.
Spend less than you earn. It’s so hard, yet so simple.