Rules of Money: Spend Less Than You Earn

To Spend less than you earn simply means to live below your means. Other ways to look at this include:

Don’t allow expenses to exceed income.
Do Not Overdraw Your Checking Account.
Pay for things you need before paying for things you want.

Some signs that do not spend less than you earn or living above your means include:

Your bills are always late
You are living paycheck to paycheck
You hate looking at your bank or credit card statement
You almost have a heart attack at the beginning of each month due to the amount of bills due
Your credit score is bad

While living below your means is very important to financial wellness, it is often easier said than done. Remember, how much you keep is more important than how much you make. It doesn’t matter how much money you make, if you spend more than you make, stress and misery will never be strangers to you.

To spend less than you earn, you must know the key difference between needs and wants. Here’s how you should look at a need and a want:

Need – something you must have to survive. Necessities or essentials that you require to live or make a living. Needs are limited in nature meaning they can be satisfied. Examples of needs are food, housing and clothing (not designer brands). For the most part your needs remain constant over time.

In today’s day and age things like basic transportation, clean water, healthcare, telephone and internet access to make a living qualify as needs. Personally I consider safety and healthiness as necessities. Which means that meeting your needs may result in illness or even death.

Want – something you desire to have but can live without. They are inessential to your survival. They are your wishes. Wants are insatiable in nature meaning that they can be unlimited. Also, your wants may change with time. Not getting your wants may result in disappointment.

Sometimes there could be an overlap between the concept of needs and wants. To determine if something is a want, ask yourself whether the thing you desire is necessary to sustain your life. If your answer is yes then it’s a need. An alternative question is, will I die if I don’t get this thing? If your answer is no then it’s a want.

How to SPEND LESS THAN YOU EARN

Clipping coupons is not the only way to spend less than you earn. There are 4 helpful strategies you need to be focusing on if you are determined to have more money left over at the end of the month.

1. BUDGETING

Focus on the following:

Big ticket items
- Cut costs on expenses like housing and transportation. Think of these areas:
  - Neighborhood and square-footage
  - Pre-owned vs new car purchase
On-going expenses – these are recurring expenses that are almost predictable. Think of these areas:
- Utility bills
- Insurance premiums – paying for a coverage you might never get to use can be a waste of money. (e.g insurance coverage on nice-to-have items with lesser value like electronic devices you can easily afford to replace down the line)
Fixed expenses – these are expenses with a set amount every month. Think of these items:
- Rent or mortgage
Variable expenses – these are expenses that fluctuate every month. You will need to figure out how to handle these irregular expenses that come up once or twice a year. A possible solution could be to identify the amount of these expenses and allocate monthly amount for it as you go, that way when it comes due you’re not overwhelmed.

2. DEBT MANAGEMENT

Avoid Unhealthy Debt – high interest debt and loan for expenses that lose value quickly or depreciate at a fast pace.
- Avoid debt with interest rate higher than 5%
  - Boats, RVs, jewelry, and luxury items
  - charges incurred on credit card balance rolled from month to month. With a credit card, your goal should be to pay-off the balance in full every month to avoid the fees and charges.
Take on Healthy Debt – any debt that will put more money in your pocket.
- Student debt that increases your earning power
  - Be smart and careful not to just take on any student loan if you can get an alternative training for less. Perform the necessary assessment in your field to determine if a certification will boost your salary at the same capacity in comparison to taking out a student loan to get a master’s degree. In highly specialized fields of study like Medicine or Pharmacy where an advanced degree is required for higher income potential, taking out student loan debt as a last resort (if you can’t get scholarship or work on the side to fund your study) is almost a no brainer in my opinion.
- Mortgage with low-interest rate (or reasonable interest rate) – over time a house has the potential to appreciate especially when purchased in the right location (with access to good schools, employment, transportation network etc)
Try a cash-only diet – it’s easy to get carried away by the convenience of paying for stuff with a credit card. But physically bringing out cash from your wallet or purse can make you question how needful your purchase is. When you can, use cash more.

3. TAX EFFICIENCY

Income taxes are a big part of your expenses. So you need to find ways to reduce your taxable income. Some people confuse paying less taxes with making less money but this is not the case. A good question to ask yourself is – how can I legally pay less taxes on the income I make? Here are a few ways to achieve ways to do that without getting too in depth:

receive income in a tax exempt form – this basically means get paid in such a way that your income is not taxable.
- For instance, you can select to defer your taxes by contributing to 401(k) or traditional IRA accounts that way you’re choosing to pay your taxes at some point down the line when you withdraw money or take distributions from the account. This is a good plan if you think you may be in a lower tax bracket at some point in the future.
- Alternatively, some employer benefits that let you set aside part of your pre-tax income for retirement, healthcare, transportation and child care

4. BOOST INCOME

In some cases, reducing expenses alone won’t cut it. Especially, when you’ve cut down expenses so much that you can no longer afford your basic living expenses. In this scenario, you’ll need to earn more money. There are numerous ways to boost your income to not only cover your basic expenses but that is topic for another discussion down the line.

BOTTOM LINE:

To spend less than you earn, you have to prioritize your needs over your wants.
You can increase your income to exceed your expenses – offensive strategy.
Or You can trim your expenses to have a leftover from your income for savings – defensive strategy.

Regardless of what strategy you pick, your ultimate goal should be to consume less than you produce.

Be sure to check out the 99 rules of money if you want to master your money and maximize your chances of building wealth as well as attaining financial freedom at some point in life.