Spend Less Than you Earn

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This could be the simplest, most overlooked, bit of financial advice ever provided. I have not ever read a book or met an advisor who thought it was going to be a great idea to spend as much as, or even worse, more than you earn. This is a true basic principal of managing your finances. If you make $100 a week DO NOT spend $100 a week. This should be pretty automatic for you at this point as you should be paying yourself first. It never ceases to amaze me how some people can spend themselves into a frenzy trying to keep up with the joneses.

If you want a good example of not practicing the spend less than you earn philosophy just look at major sports stars after they retire. They have become so obsessed with the “bling” and glamour of living large that they fail to understand the implications of the massive amount of spending they are doing. In March Sports Illustrated ran a piece titled “How (and why) Athletes Go Broke.“ According to the article:

By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.

Within five years of retirement, an estimated 60% of former NBA players are broke.

While these statistics are not indicative of just spending more than you earn, if these athletes had chosen to save a portion of their earnings and properly invest them for their future they probably wouldn’t be filing for bankruptcy or ending up broke. This problem is not limited to just the high earning athletes and entertainers but affects the middle and lower classes as well. People have a tendency to spend money they don’t have, which is why the credit card companies are staying in business. I am not a death to all credit cards kind of guy, but failing to realize where your ability to pay with liquid cash stops and you become dependent on credit will be the downfall of your financial future.

Ways to ensure you are Spending Less than you earn:

  • Make more money
    • If you are truly strapped for cash and you can’t shave another penny off of your spending you are going to have to find a way to increase your cash flow. You could ask for a raise or take on any of a number of side hustles.
  • Budget
    • Creating a budget and planning out your spending and income will help you to realize where you can cut costs and maximize your use of money to ensure you are spending less. Building your budget takes more than just sitting down one day and throwing some numbers on paper, you need to first analyze your spending, then set your budget, and maintain your budget properly.
  • Spend Less
    • This is actually easier than you think, start looking into things like buying store brand foods over name brands. Apply this type of thinking to more and more of the things you buy regularly and see where you can start to spend less for the things you buy. If things are tight, or you just want to make drastic improvements to the amount you save, cut back on the big expenses in your house like cable, internet, and cell phone plans.

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This article is part of the Suburban Dollar Back to the Basics series. I plan to cover remedial personal finance topics which aren’t as sexy, or typically covered, in the personal finance blogosphere. My hope is for people to get a better understanding of basic personal finance without boring you to death, hopefully you will be able to share these posts with family and friends to get them into personal finance and have a good foundation of knowledge.

{ 2 comments… read them below or add one }

1 Terry Pratt August 24, 2009 at 10:51 am

If you make $100 a week, how are you going to avoid spending $100 a week?

Live under a bridge?

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2 Kyle August 24, 2009 at 1:28 pm

I think you are taking my illustration a little too literally, although if you only make $100 a week you should definitely be working to increase your income so you can spend less than earn.

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