This week, I thought I would go back to basics, and provide five simple rules to help make money management that much easier. It’s not possible to cover everything about money in five rules; it’s probably not possible to cover it all in five hundred rules. But these five rules should help you to get a better handle on your money, and if you truly understand them, you’ll be a much better position financially. That brings us to our first rule:
Earn More Than You Spend
If you do nothing else to improve your personal finance situation, if you take no other personal finance advice from this site (or the thousands upon thousands of other blogs, books, magazines and other personal finance media), let it be this: keep your spending below the money you earn. If you spend more than you earn, or even the same amount of money that you earn, you won’t have the extra money you need to save, pay down debt, invest, or accomplish any other personal finance goals.
If you want to accomplish this goal, there’s two different ways you could do it. You can…
Increase Your Earnings
-Work Longer Hours: If you work for an hourly wage, the easiest way to bump up your income is simply to increase the number of hours you work. Besides helping to show your dedication to the job, working longer increases the money in your paycheck (unless you’re a salaried worker, in which case you have to hope that the dedication you show to the job leads to a larger raise). Admittedly, this may not be an option; most employers limit the number of hours you can work (and for which they’ll pay you) in order to limit their expenses. If you find yourself in this group, you might need to…
-Get Another Job: We’re not talking about leaving your current job (although, if you can find another position that pays higher than your current one, it’d definitely be worth considering), but rather getting a second (or third, potentially) job to supplement your income. It’s not for everyone (particularly those whose family or other commitments limit the amount of time they have available), but it does offer one major avenue for increased income.
-Develop Alternate Streams of Income: Easier said than done in many cases, there are ways to earn money other than working for an hourly wage. Owning rental property, creating a blog, starting your own business, or writing and selling an eBook are all options (among many) to create income that can continue and grow without your continued effort. (Of course, often forgotten in discussions of alternate streams of income is that they do take time, effort and frequently money to develop, and many times are far from guaranteed.)
If earning more money is not an option, or it’s not enough to close the gap, there’s always the second option:
Decrease Your Spending
-Cut Down Small, Regular Expenses: David Bach calls it your ‘Latte Factor‘; the tiny, daily or weekly expenses (like your morning latte) that add up over time to big amounts. If you can identify the small areas were you spend almost without thinking, plug up the leaks, and save the money, you can make a large difference in your actual cost of living (and help to spend less than you earn).
-Save on the Big Expenses: On the other end of the scale, it’s important to try to save on the large expenses, from appliances to automobiles. Comparison shopping, buying used whenever possible, and trying to delay the need to replace these big ticket items as long as possible are all ways to ensure that you don’t overspend on big expenses. You might only have one or two of these savings opportunities each year, but any method of savings on these costs is will help to decrease the amount you outlay.
–Just Cut Your Impulse Spending: Probably the best way to keep your spending below your earnings, developing the ability to keep your wallet in your pocket (or purse) when you go out to the mall (to say nothing of not going to the mall as often to begin with) is your best ally in keeping your spending under control. Just say no to the urge of spending and you’ll be able to keep more of your money. (And of course, if you cut down on recurring expenses, like monthly television and phone bills, you’ll help to save even more.)
Which is Better: Earning More or Spending Less?
While not quite a big enough discussion to be called a Great Debate, there is some discussion of whether it is better to focus on earning more or cutting your spending. Each method of closing your budget has its advantages and disadvantages. Cutting your spending is fairly quick, for example; cut the amount you pay on your cell phone bill and you’ll see the savings within a month, while resisting the urge to spend the remnants of your paycheck at the mall every other week will leave more money in your pocket almost instantly. The disadvantage is that there is a limit to how much more money you can generate by saving; you’ll never have more money than what you are getting paid (after taxes and other deductions). Add in the fact that because of the need to spend some of that money on food, water, heat and other necessities, you’ll never get down to zero spending, and there’s an even greater limit to how much spending you can really cut.
Earning more money, on the other hand, is practically limitless. Building a good blog or investing in real estate can generate as much (or even more) income as working a job (or two), meaning that the sky is the limit for your income. While there’s a limit to how much more available funds cutting spending can generate, that’s not the case with earning extra money. Of course, attempting to earn more money isn’t without its own flaws. Trying to build alternate income streams is tricky and often leads to failure; while working more hours or an extra job requires time and a willingness to work that many people lack. Either method requires a lot of time, effort, and much less certainty of how much you’ll be able to gain on top of your current earnings.
My view is that both methods are important; cutting your spending allows you to quickly boost your earnings above your spending, and lowers the bar for how much you need to earn in order to have the money for other personal finance goals. Earning more money through whatever method you choose then yields even greater rewards and helps to boost your earning above your spending. Taking advantage of every method possible to make sure that you earn more than you spend will help you to get your personal finance house in order, improving your monetary situation.