Secret To Wealth: Spending Less Than You Earn
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Secret to Wealth: Spending Less Than You Earn
We’ve all heard the old saying, “The secret to wealth is spending less then you earn.” But what does it really mean to spend less than you earn, and how can putting this simple concept into practice help you build long-lasting wealth? In this article, we’ll break down the basics of spending less than you earn, and provide tips on how to make it work in real life.
What Does “Spending Less Than You Earn” Mean?
At its core, “spending less than you earn” means not spending every dollar that comes into your pocket. Instead, it means consistently spending below your means, and putting some money aside for the future. Here’s a quick example:
- You earn $4,000 per month after taxes
- Your monthly expenses total $3,500
- That leaves $500 left over each month
In this scenario, you are spending $3,500 out of the $4,000 you earn – meaning you are spending less than your full income. That $500 left over can then be put towards savings, investments, paying off debt, or other wealth-building goals.
The key things to note are:
- You must spend below your earnings – not equal to or above
- The more you can spend below your earnings, the more money you’ll have leftover to save and invest
This concept applies whether you earn $30,000 a year or $300,000 a year. The percentages and amounts may change, but the principle stays the same.
Why Is Spending Less Than You Earn So Important?
Living below your means gives you three powerful advantages when it comes to building wealth:
- It frees up money to save and invest
- It prevents you from going into debt
- It gives you flexibility in your finances
Let’s look at each of these in a bit more detail:
1. It Frees Up Money to Save and Invest
The money leftover after your spending is crucial, because those are funds you can put to work for your future. Specifically, you can use it to:
- Save for short and mid-term goals – Things like vacations, vehicles, down payments, etc.
- Invest for long-term goals – Such as retirement, college savings, etc. Investing gives your money the potential to grow over time through compound interest.
- Pay off debt – Any extra money can go towards eliminating debts like student loans, credit cards, mortgages, etc. This clears up cash flow in the future.
Making regular contributions to savings and investments over many years is one of the key ways regular people build significant wealth. Spending below your means makes this possible.
2. It Prevents You From Going Into Debt
When you spend equal to (or above) your earnings, you won’t have anything leftover to save. In fact, you’ll likely have to use debt just to make ends meet. Relying on credit cards, payday loans, and other debt to fund your lifestyle keeps you stuck in a cycle of owing money. Debt repayments and interest take away money that could otherwise be saved or invested.
Spending less than you earn helps prevent this, because you aren’t living beyond your means in the first place. You’re able to cover your expenses with current income, rather than future income. This gives you a clean slate each month to save and invest vs. having to service mounting debts.
3. It Gives You Flexibility
When you spend everything you make (or more), you are trapped – your expenses rise to meet your income. You have no wiggle room. But spending less than you earn builds in financial flexibility. Since you’re spending below your means, you can:
- Absorb unexpected expenses or income disruptions. You have savings and less debt.
- Take advantage of financial opportunities. You have money to invest in things like real estate, a business venture, additional education, etc.
- Make lifestyle choices. You can choose to work less and make less money, because your expenses are low.
This flexibility gives you options in life. You aren’t forced to stick with a job or lifestyle mainly for the paycheck. Your finances aren’t so tight that unexpected costs put you in a hole. This freedom is invaluable.
How to Spend Less Than You Earn
Living below your means and having money leftover to save and invest is a simple concept. But it’s not always easy to put into practice. Here are some tips:
Track Your Spending
To spend less than you earn, you first need to know where your money is going. Track every expense for 1-2 months using an app, spreadsheet, written ledger, or other method. This will reveal your spending habits and patterns so you know where to cut back.
Make a Budget
Once you see where your money is going, make a budget. List your regular monthly expenses like housing, transportation, food, utilities, debt payments, etc. Tally up the totals. Then make adjustments to bring your spending below your after-tax income. Having a monthly budget is crucial for spending less than you earn.
Reduce Discretionary Spending
The best place to cut spending is on discretionary items like dining out, entertainment, vacations, hobbies, subscriptions, etc. See where you can trim – it often adds up to big savings. Pack lunches, cancel unused subscriptions, stay home more often, borrow books instead of buying, and so on.
Find Cheaper Alternatives
For major expenses, look for ways to get the same value at a lower cost. Get a cheaper cell phone plan, buy used cars vs. new, choose more affordable housing, take public transit instead of driving, and more. Shop sales, buy generic brands, and use coupons.
Increase Income
In addition to cutting expenses, you can spend less than you earn by earning more money. Ask for a raise, find a higher paying job, monetize a hobby, rent out a room in your house, and so on. The key is keeping expenses steady as income grows.
Automate Savings
Automate transfers from checking to savings and investment accounts each month. This ensures you save first before spending the rest. Out of sight, out of mind. Even small automatic transfers add up.
Avoid Lifestyle Inflation
As you earn more over the years, avoid increasing your spending to match (also known as lifestyle inflation). Keep your expenses steady and you’ll have more to save and invest as income grows. Live below your means at every income level.
Utilize a Budgeting App
Apps like Mint, YNAB, Personal Capital and others can help you track spending, create budgets, and automate saving. Take advantage of technology to automate your finances.
Start Early, Be Consistent
The key is developing the habit of spending less than you earn as early as possible. Time and compound interest do the rest. Even small amounts saved consistently over decades grow exponentially. Short spurts of saving never build lasting wealth.
Common Challenges
While spending less than you earn is simple in theory, it can be challenging in practice. Here are some common obstacles and how to overcome them:
Changing Habits
If you’re used to spending everything you make, spending less requires changing ingrained habits. Start small – try packing your lunch twice a week or skipping the daily latte. Build momentum with small wins first.
Cutting Expenses
Analyze needs vs wants, shop sales, downgrade brands, and look for cheaper alternatives. Distinguish essential costs from discretionary costs. It takes some work but cutting expenses gets easier over time.
Increasing Income
Boosting income may require additional education, training, taking on side work, finding a better paying job, or asking for raises/promotions. These things take effort but compound over time.
Budgeting
Budgeting is essential but feels restrictive to some. Focus on long-term goals, automate savings, use a budgeting app, and make budgeting a game. It gets easier with practice.
Temptation to Spend
Ads and peer pressure strongly encourage spending. Resist keeping up with others. Stay focused on goals, avoid malls/shopping online, hide credit cards, and remember the benefits.
Unexpected Expenses
Build an emergency fund with 3-6 months of living expenses. This provides a buffer for surprise costs. Get insurance to transfer risk. Start saving early so you have a cushion.
Changes in Income
Income disruptions will happen – job changes, pay cuts, health issues, etc. Live well below your means and maintain a cash buffer so temporary drops don’t derail you.
The Rewards of Spending Less Than You Earn
Committing to spending less than you earn isn’t always easy. But it’s one of the most direct paths to building wealth over time. Here are some of the rewards that come with living below your means:
- Less financial stress day-to-day and month-to-month
- Reduced dependence on debt to get by
- Money to cover emergencies without going into debt
- Flexibility to take advantage of opportunities
- Ability to weather unexpected income disruptions
- Resources to invest in things like real estate, education, business ventures, etc.
- Potential to retire earlier and have more options in your later years
- Peace of mind knowing your needs are covered
- Financial freedom to make lifestyle choices – work less, change careers, travel, etc.
- Satisfaction of seeing your net worth and investments grow over time
- Opportunity to help others through charitable giving
- Ability to provide for your family and leave an inheritance
- Passing down strong financial habits to your children
The benefits really compound the longer you stick with the habit of spending less than you earn. It won’t happen overnight, but can make an immense difference over decades.
Final Thoughts
Living below your means is simple in concept – spend less than your income and invest the rest. But it takes discipline, awareness, and good habits to put into practice, especially with all the temptations to spend around us. The key is tracking expenses, budgeting, cutting discretionary costs, and automating savings. Do this consistently for decades and you put yourself in position to build significant wealth. Be patient and persistent. Small amounts saved every month add up over time. Spending less than you earn gives you options, flexibility, and freedom. It reduces reliance on debt and provides security. And it enables you to invest in your future self. While not exciting, making this concept a habit can be life changing.