Believe it or not, the answer to getting out of debt, saving for the future and any other financial goal is the application of the same formula.
Live on less than you earn
The most basic rule of personal finance is to live on less than you earn. For some it’s intuitive, for others it needs to be taught.
If you spend nearly everything you earn, you’ll be living paycheck-to-paycheck.
If you don’t live on less than you earn, you’ll find yourself in debt.
If you live on less than you earn, you will be on your way to reaching your financial goals.
Anything you earn and don’t spend can go toward your debt or savings goals. The bigger the difference between what you earn and what you spend, the faster you will make progress toward your goals. I will call the difference between what you earn and what you spend your “margin.”
Increase the margin
The primary way to make financial progress is to increase the margin between your earning and spending. You can do this in two ways: increasing your earnings and decreasing your spending. Doing either of these will yield results, but doing both will increase and expedite your success.
For starters, decrease your expenses. For instance, with a few simple questions, you could save big on your monthly bills. Eat at home instead of eating out. If you already do that, try cooking from scratch. Try some cheaper alternatives to cable. Try having a no-spend month. Whatever sacrifices you choose to make, you will increase your margin immediately.
Start making plans to increase your income. Whether that means finding a part-time job, starting an Etsy shop, looking for a better career, or doing what’s necessary to get a promotion, is up to you. The sooner you start, the sooner you’ll increase your margin.
While decreasing your expenses is the easiest place to start and see results, in the long run increasing your income will make the biggest difference in increasing your margin. You can improve your margin through cost-cutting only to the amount that you currently spend. On the other hand, there is no upper limit to how much you can improve your margin through increased earnings.
It sounds so simple. Why is it so hard?
When your earnings increase, the natural tendency is to increase your spending. Lifestyle inflation can be sneaky and subtle. It will add up in a lot of little changes. We can go out to eat more now that we got that raise. With that raise, let’s go ahead with the bathroom remodel. We can go to Disneyland this year after all, thanks to that raise. Without even noticing, we justify away any increase in margin.
Sometimes it’s not an issue of lifestyle inflation that makes it hard to increase your margin. Sometimes you just need more income. Maybe you have cut your expenses down to the minimum and you feel like you’re just barely keeping your financial head above water. Your challenge will be getting creative in finding new streams of income. Here are some ideas to start you thinking. Don’t give up!
The third and often over-looked part of the equation is time. If your first financial goal is to get out of debt, then it’s going to take some patience. Focus on what you can do and don’t get discouraged.
It’s Your Turn!
- What’s the hardest part of the equation for you, decreasing your spending, increasing your income, or waiting?