The golden rule of personal finance
Until a couple of years ago, I was oblivious to the world of personal finance blogs and the FIRE (Financial Independence / Retire Early) community. Fast forward to today and almost all the blogs I read are related to personal finance. You could say I'm a little bit obsessed. :)
But, not everyone out there shares my obsession. And you shouldn't have to have an obsession with personal finance in order to have a good handle on your finances or be in good financial health.
If you only had the mental space to learn one rule, learn this one:
Money Spent < Money Made
It's so deceptively simple but so powerful. All of personal finance can really be boiled down into this. It's also known as living within your means.
As simple as it is, a surprising amount of people do not follow this. There are three reasons I can think of that make it hard to follow this simple rule:
- You don't know how much you make.
At first glance, it sounds hard to believe that someone would not know how much they made, especially if you have a salaried job that pays the same amount every pay period. But if your pay is varies, it may require some work to know how much you made each month. Some examples I can think of are freelancers or contractors as well as salespeople who receive commissions or bonuses. Another example I can think of are folks who are self-employed and don't know how much to set aside for taxes. If a client pays you $100 for your services and you don't know how much of that goes to taxes, then you don't really know how much money you made.
- You don't know how much you spend.
Once upon a time, people dealt in cash. And when you only deal in cash, it's easy to tell how much you spent because the money is gone from your wallet. But in this day and age, there are many ways to spend money you don't have (credit cards, layaway, payment plans, loans) and many places to store money other than your wallet (bank accounts, Venmo, Paypal, brokerage accounts). When your money is scattered all over the place and you can spend money without anything leaving your wallet (or your bank account), it really can be hard to figure out exactly how much you spent. I personally use Mint to keep track of spending just because it's so easy. But sometimes you just need a good old-fashioned spreadsheet.
- You don't control spending.
If you know exactly how much you make in a month and you know exactly how much you've spent - and if your spending exceeds your income, then you need to actively do something to reign in spending. One thing I am prone to do is buy so many cheap little things that I don't realize how much I've spent until I see my credit card bill. If my purchases were larger, I might pause a bit before spending, but $5 here and $10 there don't make me bat an eye. There is no simple solution I can give you on how to control spending (because if I had one, I'd be rich!).
I am a firm believer that there is no one-size-fits-all way to manage your finances. I think the most important thing you can do is experiment and find a way that works for you to help you follow this personal finance golden rule. If you can't think of any ideas to experiment with, let me know and I'll try to share some examples on this blog for things that have worked for some of my clients.