Everything you really need to know about personal finance can be summarized in just one paragraph. Spend less than you earn. Earn more. Live frugal. Do something sensible with the difference. Control your own destiny. All of the other writing out there on personal finance is just details.
In the end, this is the fundamental rule of personal finance: spend less than you earn. Itʼs the one point that comes up time and time again in almost every personal finance book you read or talk that you hear.
Itʼs easy to see it when you look at each side of the coin. Letʼs say you earn $30,000 a year and you spend $31,000 a year. That extra $1,000 has to be borrowed, often from sources like credit cards. The following year, in order to maintain your lifestyle, you still spend $1,000 a year more than you make, plus you spend $300 more than that just making the minimum payments on your debt, leaving you a total of $2,200 in the hole (the $1,000 extra you spent the first year plus the $1,000 extra you spent the second year plus the $300 extra you spent repaying that debt minus the $100 you actually managed to pay off). The debt builds – after the third year, youʼre $3,600 in debt. It keeps growing and growing and growing until that debt is eating up all of your income, leaving you in misery.
On the other hand, letʼs say you only spend $29,000 a year – only $2,000 less in spending. That extra $1,000 goes into your savings account and earns 3%. The next year, you drop another $1,000 in the account and now you have $2,030 in there. The next year, another $1,000, bringing you to $3,060.90. That money builds up and soon you have a house down payment or the seed money to start the small business of your dreams – or even something as simple as the ability to easily pay for a car repair without your heart skipping a beat.
The difference between these two stories is only $2,000 a year. There are two avenues to achieving this goal: spending less and earning more. By working on either (or both) of these areas, you can increase the gap between those two numbers – and that gap is your ticket to freedom. The harder you work on either spending less or earning more, the bigger that gap will become and the quicker that train to your dreams will arrive at the station.
The hardest part of personal finance is just having the courage to take that first step.
In this series on Creating True Wealth I will bring you some of the details – the ways you can save money, earn more money and manage your money to build wealth. These posts will appear every Friday.
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Learn how to manage your money, eliminate debt and build wealth in my book, Your Financial Success.Wishing you well,
Daniel R. Murphy
Educating people for building wealth, adapting to a changing future and personal development.