Pretty much any good personal finance resource you run across will talk about this:
Spend less than you earn. All this means is that your expenses (everything that leaves your wallet) are less than your income (everything that enters your wallet).
If you're spending more than you bring in, you'll have to borrow the difference. Each month, interest must be paid on the amount borrowed. If you continue to spend more than you bring in, the amount owed to the people who lent you the money will increase, and the payments back to the lender will increase as well. Eventually, so much of your income will be dedicated to repayment of debt that there will be nothing left over to live on, and you'll be forced into bankruptcy. You may be able to borrow again eventually, but the interest rates will be much higher. For a while, you may not be extended credit at all.
Is it clear that this is not a good thing to do?
On the other hand, if you're spending less than you bring in, you'll be saving the difference. These savings can be used for an emergency fund. They can be used to buy a car. They can be used for a down-payment on a house, for college expenses, and for retirement expenses. By living within your means, you can make your money work for you, rather than the other way around. The larger the percentage of your income that you save, the bigger your savings will end up being, and the more conservative you can be with your investments.
If this sounds really straightforward, it is. However, straightforward doesn't necessarily mean easy or even fun. Not only must you not spend the money initially, you may need to put it in a strong piggy bank in order to continue not spending it. Spending less than you earn consistently means having lots of financial discipline, monitoring your expenses and adjusting your budget, putting small windfalls or stimulus checks to work rather than blowing them, and resisting the temptation to borrow in order to look rich. If you're married, it means being on the same page with where things are headed.
If it were easy, everyone would be doing it, and the would be a lot fewer people in danger of working at a job they don't like until the day they die.
I mentioned in the introductory post to this series that one main reason I'm writing these posts is to remind myself of solid personal finance, so I hope to be able to learn from my own advice occasionally. ;) My biggest shortfall remains that I don't budget and monitor our expenses carefully enough. As a result, some expenses slip through the cracks and bigger expenses occasionally blind-side us, making things a little tighter than they usually have to be for a few weeks. Part of this too was adjusting first to marriage, and then to having a daughter; spending less than we earn is more difficult than it was before these things happened.
Financial independence rests more on living within one's means than it does with bringing in a big salary. A big salary makes it much easier to save, but it doesn't guarantee it. Even the wealthy have to live within their means or they will soon not be wealthy.
What if you're living on fumes and your expenses are not reducible?
Sage advice as always. As you say, it's back to basics and there really isn't anything more basic than that.
A lot of people I have spoken to about this has said "makes sense" yet at the same time, I know they're not practicing it since they keep on moaning about the amount of money sitting on their credit card!
That, to me, doesn't make sense. Sometimes I point this out, sometimes I don't.
Good post. I would add that this is the time of year where folks have a tendency to spend year end bonuses that they anticipate receiving, well before the bonus is received. This should not be done because it requires the use of credit and it sometimes lead to a disappointment when the expected bonus does not arrive.
Disgruntled: If expenses aren't reducible what about increasing income? The imbalance must be fixed or bankruptcy is on the horizon.
Andy: It always seems a bit strange (to me anyway) that I can write about these things and still have areas to work on.
TML: Right. That can be a major buzz kill. 😉
I'm trying without success to increase income. And bankruptcy isn't on the horizon, just a bleak indefinite existence of living in a 12 x 12 room, being barely able to pay bills, but never getting ahead. (Indeed, since I have only student loan debt, bankruptcy wouldn't even help.)
p.s. The only year-end "bonuses" I have received have consisted of Christmas food gifts (e.g. fruit basket, cheap box of chocolates).
@disgruntled I can sympathize with the student loan debt. I had about 17K in student loans several years ago. I did manage to pay them off. I lived quite frugally to pay the debt down, and I continue along this path today. It's not fun, but it can be paid off. 🙂
I agree, simple but necessary. For some reason that is a concept a lot of people don't quite understand. You can't spend what you don't make, and what you do make, is not the full amount because of taxes. People need to realize what they actually make before spending.
I've done much to cut my spending and am now working on increasing my income. Thing is though, any additional money needs to be put toward reducing your debt. Make some headway on your debt by paying yourself first.
Hi
I think it is just a matter of plain economics.
You cannot outlay per month more than you have coming in per month.
If you do it is a one way street to bankruptcy.
You must make some savings somewhere.
David