When it comes to building wealth, the formula is simple: earn money, spend less than you earn, save, invest, and repeat the process. This sounds like a simple set of instructions, and on paper, it is. But a simple concept doesn’t mean it is always easy to put into practice. The good news is that some simple changes in your lifestyle can have a lasting and meaningful impact if you stick with them.
Spending less than you earn is one of the most important financial concepts to understand and live by. If you don’t live on less than you earn, you will never get ahead. Spending less than you earn may take some initial life changes, but the longer you do it, the easier it is to continue doing it.
It is amazing how easy it is to blow through money without realizing where it is going. Take the time to track where and how you are spending your money. You can use a system as simple as a notebook and paper, or an automated program such as Quicken. There are also many free online money management tools you can use to help you manage your money. Knowing where your money goes makes it easier to understand where you can cut back to free up extra cash to pay down bills or save more money.
Once you know where your money is going, you can make a budget. You should have a good idea of your recurring expenses and a decent idea of how much money you spend on variable costs such as gas, groceries, travel, entertainment, etc. Use your budget as a guide to control your spending. As you refine your budget, you should be able to free up some cash flow every month. If not, you will need to make extra money.
I like to save money. Bargain hunting has always been a hobby for me. But saving money is more than just looking for bargains; sometimes it’s about avoiding spending altogether. You can save money by bringing your lunch to work instead of eating out every day, opening windows instead of running your air conditioner, or reusing or renting things instead of buying new.
An emergency fund may not seem like it belongs in a list about how to spend less than you earn, but it does. An emergency fund gives you a buffer to take care of unexpected expenses so you don’t spend more than you earn by blowing your savings or taking on debts.
f you are in debt, set up an emergency fund, then pay it down before sending all your money to investments. Your emergency fund can help keep you out of debt. Reducing your debt will also lower your monthly payments and hopefully increase your monthly cash flow – making it easier to spend less than you earn.
When you spend less than you earn, you are no longer playing catch up and living a paycheck to paycheck existence. The stress that comes from living paycheck to paycheck and worrying making late payments can be paralyzing. You owe it to yourself to live as stress free as possible so you can enjoy life. Spending less than you earn is a great way to reduce your money worries. It also allows you to save and invest for your future.
