Personal finance is easy. It’s simple. There is one fundamental law that governs your money. If you master this, you have mastered the entire game: To gain wealth, you must spend less than you earn.
In David Copperfield — one of my favorite books — Charles Dickens wrote:
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
That’s all it takes. Think of it another way. Think of it like an arithmetic equation:
[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]
If you spend more than you earn, you are losing wealth. You are accumulating debt. You are heading in the wrong direction. However, if you are earning more than you spend, you are accumulating wealth. The greater the gap you can create between earning and spending, the faster you will accumulate wealth. There are only two things you can do to gain more wealth: spend less and earn more.
Spending less is something that you can do right now with little or no effort. Just stop spending money. Seriously. That’s it. Don’t buy things. Sure, you need to buy some things, but if you learn to pay less for the essentials (food, shelter, clothing), and if you can learn to reduce your wants, you can trim spending by a shocking amount. Learn how to shop for groceries and to make your own food. Develop a frugal mindset. Live simply.
Earning money is the other half of the wealth equation. If you can increase the amount you earn, you will accumulate wealth more quickly. Because earning money is so important, many personal finance books stress that your career is your most important asset. Your most important asset is not your house; it’s not your investment account; it is not — heaven forbid — your car. It’s your career. This is why a college education is so important: it can help you land a better job, can increase your earning power. This is why your professional reputation is so important: what your employer thinks of you, what your co-workers think of you, what your customers think of you all play a role in your success. If you treat your career like a prized possession, you’ll have greater success at finding better paying, more-fulfilling jobs.
This may seem petty or obvious. But smart personal finance really is this simple: spend less than you earn. Everything else — the paying yourself first, the investing ten percent of what you make, the emergency fund, the debt snowball — everything else is simply done in support of this fundamental law. When you grasp this concept, most financial decisions become obvious.
by J.D. Roth