Spend less than you earn

This is the third of a fourteen-part series that explores the core tenets of Get Rich Slowly.

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” — Charles Dickens, David Copperfield

When people ask me for my top tip on personal finance, they’re often disappointed. My top tip isn’t sexy. “To get out of debt and to build wealth,” I say, “you must spend less than you earn.” People are hoping for something more — some sort of mystical secret. But you know what? As mundane as it sounds, that is the mystical secret of money.

If you want to get out of debt and build wealth, all you ever need to do is spend less than you earn. Everything else we talk about at Get Rich Slowly is window dressing, a prop in support of the fundamental equation of personal finance:


The wider the gap between what you earn and what you spend, the more financial success you’ll achieve.

Spend Less

This simple formula has a couple of implications. The first is that frugality can have a very real impact on your financial situation. Frugality is an important part of personal finance. When you decrease your expenses, your cash flow increases. If you’re living paycheck-to-paycheck on $3000 a month, reducing your monthly expenses by $300 can give you substantial breathing room. (See the Charles Dickens quote at the start of this article.)

The big advantage of thrift is that you can implement it immediately. In theory — if there were no psychological factors — you could cut your expenses in half today and your savings would sky-rocket. Thrift pays immediate dividends.

The disadvantage of frugality is that there’s a limit to what you can do. You can only trim so much from your budget before you become miserable. Or until you don’t have enough for food and shelter. If you earn $3000 a month, you only have $3000 total you can cut. At $3000 monthly income, your maximum positive cash flow is $3000.

Earn More

Thrift has limits. You cannot spend less than zero. On the other hand, there is theoretically no limit to how much money you can earn. Frugality is important, but if you want to make real progress, increase your income.

In the 3-1/2 years I’ve been running this site, I feel like I’ve never been able to make this point emphatically enough. The people I know who have met with wild financial success have all done so by increasing their income in some way. They’ve all had to make sacrifices to do this, but once they’ve met their goals, they’re able to scale back to a normal way of life. If you want to destroy your debt — not just defeat it, but destroy it — do something to boost your income. How do you earn more money?

  • Work longer hours.
  • Get a second job.
  • Start a small business.
  • Sell the stuff you have.

All of these work, but they all require sacrifices — especially the sacrifice of time. Most people feel that these options aren’t right for them. If that’s the case — if you’ve already cut your spending to the bone and you’re unable to earn more — then there’s really no answer other than extreme frugality and patience.

There are No Silver Bullets.

There’s no magical way to change the fundamental equation of personal finance: To build wealth, you must spend less than you earn. If a person has already cut her spending to the bone and is unable to increase her income, she will continue to struggle.

This is the third of a fourteen-part series that explores my financial philosophy. These are the core tenets of Get Rich Slowly. Other parts include:

Look for a new installment in this series every Monday through the end of the year.

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There are 50 comments to "Spend less than you earn".

  1. Generation Y Investor says 12 October 2009 at 05:26

    It has been said a million times but you can never hear it enough. Spending less than you earn year in, year out is the way to build wealth. It’s ironic in a way, that the best advice is often very simple, but very hard for some to follow. Nice post J.D.

  2. Ms. Clear says 12 October 2009 at 05:34

    We’re having a great deal of trouble getting both adults in this household employed on a full time permanent basis. The employment picture is just brutal.

    However, by following this advice, our financial situation is not brutal. We can breathe easy because our expenses are firmly under control and we have no debt. So, when a temporary job opportunity came up, we are able use that temporary pay for lots of extra savings, which will give us even more breathing room when the job search resumes.

    I scour these blogs looking for simple frugality tips. These are things that save me just a couple of dollars sometimes. But they add up. For those on modest incomes, looking for ways to save even five bucks pays off. Yes, it’s time intensive, but it works. Every cheap recipe I find, every household hack I use reduces the amount of money I need to spend.

  3. andyg8180 says 12 October 2009 at 05:55

    You must also consider your savings account as a bill… you must include that account into the “spend” category… Its a false bill, but it’s another trick to increase savings…

    So, consider 10%-12% of your pretax income as a bill to yourself… And you DONT skip it… Like you wont skip your rent/mortgage, that bill is just as important…

    That’ll decrease your disposable income and cause you to be more frugal and spend less on impulse buys…

  4. BadskiBlog says 12 October 2009 at 06:00

    This point goes overlooked so often because it isn’t sexy. Its not shorting stocks on a the first wednesday of the month after an aggregate weekly loss in the financial sector while doing a backflip. I think it is also largely unfollowed because people see frugality and in the words of our British brethren Iron Maiden “run for the hills.” Frugality doesn’t have to mean living a life sans any material possession for the sake of saving. Frugality means determining what you are going to save each month and be willing to make sacrifices to maintain that amount. I have a historical amount I completely blow each month, and whether that is on beer or a trip to the caribbean I have no guilt. Obviously if you make a lot less your sacrifices may be greater, but that is where your point about making more income comes in. I actually find this portion more difficult than being disciplined in my saving each month but that is just me. Great post.

  5. Michael says 12 October 2009 at 06:27

    I make only 26K a year and my company has frozen any raises until who knows. I am frugal and have tightened my budget about as much as I possibly can. With such a low income, theres only so much I can do as mentioned in this article. I have been looking for a better job for some time but have had no luck. I have pretty much sold any extra things I have had laying around and don’t use. The only other thing I can do is stop cnotirbuting to retirement (I am 25).

    Anyone have a job where I can earn extra money?

    • John says 07 February 2012 at 11:19

      Stop looking for a job and start working for yourself!! start your own business, perhaps look at what your hobbies are and what you enjoy doing

  6. Little House says 12 October 2009 at 06:40

    I’m 100% in agreement with you, spend less than you earn, and try to make more than you need; great combination.

    My husband and I have quite a few avenues of income that we are working on and hoping that in the next few months we’ll see income come in. His business has slowed down, but thankfully I’m working full time right now. If all goes well, we’ll be looking great in the beginning of next year.

    We’ve trimmed our budget back, but not to the point where it’s painful. We are contemplating moving to reduce our living expenses so we can save more on a down payment. However, moving takes time, energy, and money, so we haven’t yet decided on this.

    As for the comment Michael (#4) left, what about working at Starbucks at night for some extra money? A few years back, I lost my job and was working on becoming a substitute teacher, I also got a job at Starbucks because of the flexible hours. Maybe that would be an option a few nights a week. Especially since he is only 25, he should have the energy to pull it off.

    -Little House

  7. Brenda says 12 October 2009 at 07:10

    The job market is BEYOND brutal right now. Forget second jobs. Most people are extremely lucky to have a first one.

    For me, it hits especially hard today to hear ‘tips to make more money – Get a second job’. I am having to move back in with my parents, since I haven’t been able to find full-time employment (or even more part-time employment), and I’m out of options. I called this very morning in fact, to see if I could transfer the part time employment I do have at Home Depot here to the Home Depot store where my parents live. There are NO openings there. None at all. So I’ll be losing this job (and subsequently, my insurance that I have through the job, if COBRA turns out to be too expensive).

    At least I still have my graphic design freelancing job that pulls in around $8000 a year gross. Still, it’s a brutal job market, and I am looking forward to the economy picking up, and hoping jobs increase soon (and not in 3 years, like some economists are predicting.)

    But even in all this, I’ve still been spending just a tad less than I earn, and keeping out of debt. It IS possible to spend less than you earn even if you make minimum wage or around that. It’s just very hard and takes a lot of discipline, but it IS possible.

    If I can spend less than I earn making poverty-level wages, then those of you with $3000 take home-incomes (like in JD’s example) should DEFINITELY be able to do it.

  8. Rob Bennett says 12 October 2009 at 07:17

    The points made in the post are valid enough in a strictly logical sene. But my take is that they paint too dark a picture of the path to financial freedom.

    Our decisions about how to spend money are our decisions about how to live. We learn about ourselves and about what the world has to offer and about what we value as we become more effective in making money choices. It’s not a boring zero-sum game. It’s an exciting life adventure.

    The blog entry makes it sound like it’s a bad thing that there are limits to what can be done. I’m not so sure. The limits are the rules of the game. Would baseball be fun without foul lines? There have to be limits to the money game to make it meaningful. It’s figuring out a personal plan through which to confront those limits that makes the game fun.


  9. Adrian says 12 October 2009 at 07:39

    As much as some people may find JD’s message of this article repetitive, I feel it cannot be emphasized enough because it is the essential BASIS for improving finances and building wealth.
    I see the sole difficulty is that people will “discuss” spending less than they earn, but it is inevitably useless until they put it into practice.

    From my personal experience, just when you think you can’t cutback ANYMORE or make ANYMORE money, there are ALWAYS ways. We have to utilize our creativity especially in the frugal lifestyle to find ways and means of achieving our goals. It’s a simple solution, but tough to follow. However, anything worthwile and truly valued in life is nevery easily earned — thus we learn to cherish them even more.

    #7 Brenda: Best of luck. Many people are going through similar trying times so never feel that you’re alone. I like your positive outlook because you’re right: it IS possible. 🙂

  10. Alex says 12 October 2009 at 07:45

    LOL. Very deep thinking here. Let me offer another nugget: To win at sports one must score more points than the other team.

  11. Shane says 12 October 2009 at 08:02

    Many people might think of being frugal as a painful task. In my opinion, it makes life easier. When you cut yourself from the game of “Keeping Up With The Jones'”, it’s almost like cutting the shackles off your free will.

    It’s a lot more fun to do simple things in life, knowing you don’t have to worry about your financial situation versus having all the latest and greatest toys, but constantly wondering if you’ll have to sell them just to put food on the table.

    This quote fits well with frugality: “You won’t miss what you never had.”

    My brother and father keep trying to convince me that I need a GPS for my car. I say, “why pay when mapquest is free?” Not to mention, I’m extremely good with orienteering. Well recently, my brother’s GPS was stolen. Because he was so accustomed to the gadget, he NEEDED to buy the new one. He missed having it.

    Sometimes having all those toys can mean forking up even more money: stolen, broken, accessories, etc.

  12. Oleg Mokhov says 12 October 2009 at 08:09

    Hey JD,

    To be financially stable, spend less than you earn. To be wealthy, earn more than you spend.

    I feel the former is the first step. Becoming frugal, getting out of debt, and so forth. But once those things are accomplished–and even setting the mindset before that–earning more than you spend is the key to really living life how you want.

    That doesn’t mean purposefully buy the most expensive stuff. This mindset just means not to compromise, to get what you REALLY want, not what you can just afford. You then use that as a driving force to build enough income to support how you want to live – while staying frugal, of course.

    If you love snowboarding, you don’t spend money on other sport equipment that you won’t really use, but then you buy the best board, bindings, boots, and winter clothing that will maximize performance and your enjoyment on the slopes.

    Thanks for the simple but effective reminder of initializing the building of wealth,


  13. Tim says 12 October 2009 at 08:13

    the simplest things are sometimes the toughest to do. you wise grasshopper

  14. Tyler Tervooren says 12 October 2009 at 08:18


    I think you’ve made it pretty clear over time that earning more is really the only way to supercharge your success.

    Maybe a series of case studies of people who’ve managed second jobs or found new avenues in a tough economy to boost their income would be helpful to GRS readers?

    The general sentiment seems to be that everyone knows that’s what they need to do, but given the economy, they feel it’s beyond their abilities.

    Perhaps a series of down-to-earth success stories could give people the boost they need to see that it’s not impossible or beyond them?

  15. bethh says 12 October 2009 at 08:28

    I’m glad you mentioned patience. I often think that people focus on making more because it feels like a silver bullet.

    I’d rather enjoy my more-simple life: I have just one job that I can leave behind at 5pm; I also have time and money that allows for hobbies, seeing friends, and some travel. I have goals and I know that I AM getting there.. it’s just taking time.

    In the next 20 months, I’ll have a fully-funded 6-to-9-month emergency fund and will be completely out of debt. Yep, I’ll be hitting forty, and chances are I’ll still be single and renting, but that’s the way things have worked out for me. A mortgage in my part of the world would at least double my monthly living expenses, and that’s not acceptable or feasible.

    I’ll continue to work on getting money in the bank (I’ve been saving for retirement all along), and that will allow me to take advantage of any opportunities that may arise, up to and including leaving this part of the country for a less-costly place!

    No debt + money in the bank = freedom.

  16. Vanessa says 12 October 2009 at 08:35
    When I was digging myself out of debt all of the financial blogs/sites/books I read said “cut, cut, cut.” For those with middle-class incomes who got into debt on lattes and shopping sprees, the advice was sound. But for someone like me (not a lavish spender) with a low income who had cut as much as I could, the advice was discouraging. I’d read stories of people paying off $50k, $70k, $100k in only a couple years just by cutting back or deferring luxuries. I was struggling trying to pay off $10k and that took me nearly five years. I was disappointed in myself that I couldn’t progress at the same rate they did.

    I never truly was able to take control of my debt until I got a second job. It not only helped me pay off my debt faster, but I also was able to contribute to an efund along the way. Coming out of credit card debt with savings gives such peace of mind I can’t explain. I should have made the connection between income and wealth then but I didn’t. But now I’ve realized that to truly gain the wealth that I want, my income has to go up and that is what I am focusing on. I am facing a layoff next year with no idea what I want to do next, so I am temporarily cutting back on retirement contributions. I plan on diverting those funds into paying for courses & activities that will increase my employability. Taking steps to improve myself in the short-term will ensure a stable financial future in the long run.

  17. Rick Francis says 12 October 2009 at 09:27

    Sometimes the basics, are just that BASIC… a related point is that no matter how much you earn you can always spend it all (or more)!

    @Brenda #7
    >If I can spend less than I earn making poverty-level wages, then those of you with $3000 take home-incomes (like in JD’s example) should DEFINITELY be able to do it.
    Good for you that you are still saving something even with so little income! You seem to have a good head on your shoulders- keep trying and I’m sure you will find something in the short term. In the long term because you are willing to make the necessary sacrifices like moving back home will make all the difference later in life. The best thing is that once you get used to living on less it isn’t a sacrifice to keep doing it…

    -Rick Francis

  18. Paul says 12 October 2009 at 09:43

    Just one correction, one of those things that seems small, but is in fact a significant mistake.

    Wealth [Net Worth] = (stuff you own + cash on hand) – liabilities

    You can include the present value of future guaranteed income (annuities, etc) in the stuff you own category.

    Spending less than you earn is a great idea, and certainly a big part of building wealth, but it’s just a part of the picture. You can spend less than you earn and still have a negative net worth, and have that net worth decrease. Wealth is far more than just cash flow.

    Understanding the entire wealth picture is pretty important.

  19. Frank says 12 October 2009 at 09:44

    Shane. It’s almost Christmas. Maybe you can hint on a GPS from your brother and father. I just get in the habit of taking my GPS out of the window each day to prevent theft.

    If it’s a situation where time=money, a GPS moves things right along. Not to mention finding cheaper places to shop when you have to in an area you’re unfamiliar with.

    If you’re printing out these Mapquest directions, you are still spending money on paper and ink. Pennies at a time, but it adds up.

    Finally, you may find quicker ways to get from point A to B that you have never thought of. You will be using less gas and again saving money.

    Side note: What about save more than you spend?

  20. Studenomics says 12 October 2009 at 09:54

    A long, long time ago I found Get Rich Slowly while on the pursuit for finding this “mystical secret.” Deep down inside I knew there wasn’t one but I still searched for it. Similarly, I often search for eating tips online when I have a background in the personal fitness. I know chips are bad yet I can’t resist a bag of Doritos.

  21. J.D. says 12 October 2009 at 09:54

    @Paul (#18)
    You’re right, of course. The actual formula should be CASH FLOW = WHAT YOU EARN – WHAT YOU SPEND. Or, if we want to keep it about wealth WEALTH = WHAT YOU *HAVE* EARNED – WHAT YOU *HAVE* SPENT. I’m exercising poetic license. 🙂

  22. Niel Malan says 12 October 2009 at 10:03

    I think this post touches an important point. If one cannot live more frugally nor increase income, and expenses equal or exceed income, then there’s poverty. It becomes exceedingly difficult to start building wealth if one lives under the breadline.

  23. Paul says 12 October 2009 at 10:05

    I think your point is correct that a positive cash flow is a good thing, and certainly is a requirement for getting out of debt, the key to building wealth. I get where you’re going with the poetic license.

    But having a positive cash flow doesn’t mean your wealth is increasing, and having a negative cash flow doesn’t necessarily mean wealth is decreasing.

    This is one of the reasons I highly discourage reading ‘Rich Dad Poor Dad’.

  24. Jen@Balancing Beauty and Bedlam says 12 October 2009 at 10:52

    This advice, implemented over the last decade, is what has gotten our family (with five children) through the last nine months of unemployment. Not because my husband was making a huge salary before his company got bought out, but because we have lived well below our means over a long period of time, and sustained that, even when our income went up. With some creative income coming in from other streams (my blog etc), we are prepared for an entire year of unemployment.
    Modeling this for our children is where the benefits really add up. We do not want them to ever get caught in a financial crisis because they did not have a plan or understand the disastrous effect of debt.

  25. Steven says 12 October 2009 at 10:55

    Every time a discussion on wealth is started, I remember a joke that Chris Rock told in one of his performances.

    “What is the difference between rich and wealthy? … Shaq is rich. The white guy signing Shaq’s paycheck is wealthy.”

    Like Paul (#23) says, a positive cash flow does not necessarily build wealth. Imagine a 2 millionaires who take in 1 million a year (going out on a limb and assuming 500k is enough for all “expenses”) and one is spending 500k on cars and toys, while another is investing wisely in stocks and new business ventures/reinvesting in their own business. The former is losing wealth over time, and the latter is building wealth (ignoring the catastrophic financial meltdown).

  26. Chett says 12 October 2009 at 10:56


    You said, “If you want to make real progress, increase your income.” I have a friend who makes nearly $300,000 a year. He spends money like he makes $400,000 a year. He doesn’t have an income problem, he has a spending problem. The same could be said of someone making $50k.

    I took a class in estate planning where the professor made this statement. You will meet a lot of clients who have money and there are two types.

    Income statement rich (Those who make $200,000 a year, but spend $225,000) and

    Balance Sheet Rich (Those who earn $200,000 and keep a large portion of their earnings)

    For those that are trying to “get ahead” financialy, they only need to make enough to provide comfortable needs, it seems to be the wants or excessive needs that get us in trouble.

    @Micheal #5 I found a parable that is fitting for the delima of the economy is too poor for me to prosper.

    The Parable of the Hotdog Vendor

    There once was a man who lived by the side of the road and sold hot dogs from his hot dog stand. In fact, he sold very good hot dogs. He put up highway signs telling people how good his hot dogs tasted. He stood by the side of the road and called out, “Buy a hot dog, mister?” And people bought his hot dogs.

    They bought so many hot dogs, the man increased his meat and bun orders. He even moved into a larger premises. He bought a bigger stove so he could meet his customers’ demands. And finally, he brought his son home from college to help out in the family business.

    But something happened. His son said: “Father, do you not watch television, or learn anything from the newspapers? Do you not know we are heading for a recession? The European situation is unstable, and the domestic economy is getting worse.”
    And the father thought: “My son is a smart boy. He has been to college. He ought to know what he is talking about.”

    So the man cut down his meat and bun orders, took down his highway signs, and moved out of the larger premises.

    His sales fell almost overnight. “You are right son,” said the father. “We certainly are in a serious recession.”

  27. Tyler Karaszewski says 12 October 2009 at 11:27

    Using some of the standard personal finances assumptions, you can retire with a $50,000/year cashflow if you’ve got savings of $1,250,000.

    If you make $36,000/year, and can scrimp and cut every corner, and live on half that somewhere around the poverty line. If you save the other half, you can save up your $1,250,000 in just about 25 years.

    Or, if you can increase your income to $72,000/year, you can skip the scrimping and saving, live on the full $36,000 you were making before (which allows you twice as much to spend in every category), save the rest, and you’ll be able to retire with your $1.25 million in 18 years.

    With the increased income, not only do you reach your goals *faster*, but you do it while living more comfortably along the way. The second part is something that scrimping can’t get you.

  28. Steven says 12 October 2009 at 11:55


    Or skip the lifestyle inflation and retire even sooner. =D

  29. Tyler Karaszewski says 12 October 2009 at 12:05

    Not every increase in standard of living deserves to be dismissed as “lifestyle inflation”.

    The idea that our current standard of living is perfectly fine and there’s no reason we should want change/increase it is ridiculous and defeats the entire purpose of sites like this.

    If you’ve lived in debt for the last 10 years, why change now? That’s lifestyle inflation. Lived in a bad neighborhood down by the railroad tracks? Stay there, otherwise — “lifestyle inflation”. Tired of walking to work in the snow in the winter? Too bad, buying a car would be “lifestyle inflation”. Did your grandparents dismiss electricity and indoor plumbing as “lifestyle inflation”? No? Do you think they *should* have?

    If you’re not living as a hunter-gatherer, wearing skins, sleeping on the ground, and dying of tooth decay at 30, hey, lifestyle inflation. How gratuitous.

  30. Laura in Atlanta says 12 October 2009 at 12:11

    I love cutting an expense that was a monthly cost for me and then immediately setting up a automatic transfer of that cost to my savings account.

    I recently was given the opportunity to have free parking at work, instead of paying $50/month. The first month I parked free? I started a monthly $50 transfer to my savings account. This way, I dont feel the impact to my checking nor am I tempted to spend that money on something else and I truly am saving $600 a year! I have recently been doing this with many different things – cancelling magazine subs is the most recent one – and i can see the balance of my savings really strting to grow!

    Automate, automate, automate!

  31. Julien Couvreur says 12 October 2009 at 12:56

    Technically, your formula is missing a factor, the [VALUE OF MONEY].
    Speaking about the dollar specifically, it is sad to see how much the money supply has been diluted since the 30s. It actually makes it harder to build wealth.

    I’d be interested to hear from you and your readers on how to account for the inflation of the money supply by government when planning your personal finances.

  32. FrugalHomeAV says 12 October 2009 at 13:09

    I’m trying to increase income by blogging. I chose a niche that I know well, and that seemed like was somewhat missing from the web. We’ll see if it works out well or not.

    For me the biggest challenge in my personal finances isn’t the day-to-day spending, it’s being able to properly plan for the bigger expenses like car repair or buying new gutters. It seems like there are so many categories that need to be saved for. I probably just need to increase my overall savings amount.

    One thing I have made very good use of is my skill in reducing expenses through “sweat equity”, e.g. fixing the cars myself or optimizing the things I already have so I don’t have to buy new stuff.


  33. Shane says 12 October 2009 at 13:50


    Honestly, I don’t want a GPS. I see what you mean about potential costs that could be avoided with one, but I have never had an issue with any of these. I rarely travel anywhere where I can’t find my way, and when I do, I memorize the directions. A GPS might be more cost efficient for you, but for me, it’s just another burden.

    The point I was trying to make is that toys aren’t necessary, and sometimes they can cost more money than we planned.

  34. kazari says 12 October 2009 at 14:47

    – Work longer hours.
    – Get a second job.
    – Start a small business.
    – Sell the stuff you have.

    You forgot the easiest one – get a BETTER job. I forget where I read it, but a survey of 20-30 year olds showed the best way to increase your income was to change jobs. Obviously harder in a shaky economy, or a very narrow field, but it’s still worth looking. Your best chance to negotiate a higher wage is when you take on a new job.

  35. Avistew says 12 October 2009 at 14:52

    I’m always surprised by the number of people who just don’t get that. In that show I watch, “Til Debt Do Us Part”, the host needs to tell ever couple that they need to spend less than they earn.
    In theory, every one knows that. Yet they all spend more. Even a couple that wasn’t allowed to use credit anymore after 2 bankrupcies, and still spent more than they earned by not paying their bills.

    And while it’s true there is a limit to how little you can spend, but not how much you can earn, let’s not forget both are needed. You said it yourself, you can’t outearn dumb spending. You can earn lots and still spend more. You need, the way I see it, to first learn to be frugal. Then try and earn more while resisting lifestyle inflation.

    And remember about your priorities. Is it being rich? Then take 2 or 3 jobs and earn. Once you have more money it reproduces faster.
    But what if your priority is to save slowly while keeping a more relaxed life?

    Some people might not be willing to renounce some pleasure, and therefore will need to work more to pay for them. Some will be willing to live with nothing for the price of rest time.

    It’s important to make these kinds of decisions, but you need to know what they mean. You’re not going to ever be a billionaire if you only save 10 bucks per paycheque, and never increase the amount. However, you can START with 10 bucks and increase it, and be very wealthy in the end.

  36. GE Miller says 12 October 2009 at 16:41

    The problem in increasing income is that one often thinks “what’s another $200 when my income was increased $2,000 this year?”. More income almost always leads to more spending. Those who can fend off that temptation are the ones who truly get ahead.

  37. Puma says 12 October 2009 at 17:44

    I am in my late 40’s and have achieved most of the goals GRS promotes. We have paid off the mortgage early and we have no other dept. We max out my 401k and IRA’s and save as much as possible beyond that. I think by almost any definition we are millionaires – just.

    I also note the following:
    – I drive an older Honda civic and plan on driving it for years to come
    – We live in a two bedroom house on a tiny lot. My kids share a room.
    – We do not have cable television
    – Our furniture is old and much of it hand me down
    – We buy clothes only as needed and some have argued we understate the need
    – We clip coupons
    – We donate 10% of our pretax income to charity — church, habitat for humanity, doctors without borders. If you are going to save money, make it meaningful.
    – Our emergency fund, if you want to call it that, could keep us going for years

    Yes, this is because we spend a fraction of what we make and save and invest the rest. At the heart of all successful financial planning rests the concept that you must spend less than you earn. What this has given us is a degree of financial security that few people seem to have any more.

    What I am not is financially independent. I need to work to get health insurance and to rebuild my retirement plan. We do not have enough savings to retire now even on my budget. I am keenly aware that if I were to lose my job a single health crisis could wipe out most of what we have saved (I am praying for healthcare reform). Security is never absolute.

    While I could say a lot more I will leave you with two thoughts. First, I have been fortunate to have a better than average income but have worked to have lower than average expenses. Second, in any given year I felt like we saved little if anything as the market fell along with interest rates on our savings accounts, but over the long term (20 years or more) I have watched our net worth generally rise. Patience is the key.

  38. Suzanne says 12 October 2009 at 18:39

    Very helpful post. Of course its common sense, but it’s a good reminder. I think it’s easier to gloss over the possibility of increasing income because it seems very long-term. “Once I get that PhD, or law degree, then I’ll make the big bucks”. But there are ways to increase one’s income in the short term. The best way is to raise one’s rates (for those who work for themselves) or look around at similar jobs in other companies. We often undervalue our own worth. While my firm probably wouldn’t pay more for my current job, I need to talk to my boss about what I need to do to get promoted.

  39. david says 12 October 2009 at 19:30

    This goes along quite well with the only rule you’ll ever need to be able to handle credit cards.

    And that is, if you can’t afford to pay it off by the end of the month, then you can’t afford it.

    It took me a long time to fully understand that

  40. Andrew says 12 October 2009 at 22:54

    I disagree a little bit, [income] – [spends] doesn’t equal wealth. It gives you savings, a starting point to create wealth. Savings are a form of wealth, but savings should be put to use, using your money to make money, property investments, bonds, CD’s etc..

    Steven (25) – Good Call!

  41. Vas says 12 October 2009 at 23:10

    This is just common sense.If anyone is not following this than prepare for a rocky future filled with financial debt, defaults, bankruptcies etc.

  42. kenyantykoon says 12 October 2009 at 23:15

    i saw an argument similar to this in mark cuban’s blog but he was talking with business in mind. i hope robert kiyosaki reads this because he argues that you have to live above your means(easier said than done )

  43. Annette says 13 October 2009 at 04:20

    Great post, JD. It seems so simple when it’s set out like this, I wonder why the lesson is so hard (and slow) to learn…

    Although I have been following GRS for a while, I am enjoying this series on your financial philosophy. Looking forward to the next installment.

  44. Jeff says 13 October 2009 at 06:14

    Where to start?

    For the “i can’t get ahead because I can’t find a second job crowd” keep looking and look everywhere, where I live there are still alot of less than glamorous jobs available, from fast food to day care, etc. Don’t let the world stop you, maybe even offering your services. Babysitting, walking dogs, anything else you can think of. Get creative, too often we let the world (i.e. thinking its a depression so finding a job is hard) stop us, don’t give up and you’ll find a second job if you’re willing to do anything legal.

    To the we can’t cut expenses any more. This can get tough, but for most people we can, we simply choose not too. Look for all the ways mentioned but also look at downsizing your home, look at moving in with family etc.

    To the lifestyle inflation isn’t really lifestyle inflation person. Really? Citing a few off hand examples does not apply to most Americans. What does apply is 40+ channels of cable ($55/mo), cell phones ($30-150/mo), 3000 sq ft homes, 2 cars, microwaves, 3 TVs, closets full of clothes, hot tubs, I could go on and on. Of course having running water is a good thing, please don’t try to argue against frugality with some off the wall examples.

    Lastly, alot of social pressures have made frugal lifestyles in America much more socially difficult. I knew a family that emigrated here from China, they all lived together in a small place and worked multiple jobs. Saving this money for several years allowed them to start buying real estate and restaurant businesses (where my wife worked for them for years, they are dear friends now) in which they all continued to work. Guess what, they are all wealthy now. My point is families and friends don’t help each other out, we believe its below us to work together as a family, but doing so helps us to pool resources. Imagine the money you could save without rent/house payment, imagine the reduction in costs for retirement when the grandparents live with their family. These things were common practices in past generations and many parts of the world, families helped each other out. This reduced their exposure to financial risk and increased their ability to produce wealth. I’m not saying everyone needs to move in with mom and dad, i’m just saying there is this huge social stigma to it and when the finances require it, families should be able to take care of each other instead of waiting until they are completely broke. I have been around families that have occasionally done this to great effect, for example living with mom & dad and saving for a down payment for a house. If you save $1000 mo that would go to rent, you’d have a $12000 down payment in a year, put this with extra money saved from utilities, maybe some food savings (eating together does that) and you could have significantly more.

    My point is there is alot of ways to save money and earn more income if you need to. We let outside circumstances define our ability to succeed, don’t let your mind dwell on excuses, instead work on solutions and you’ll get there. Do what works for you, but concentrate on what works for you, not on what doesn’t work. For most Americans financial peace is a very achievable possibility.

    P.S. I agree with the post on healthcare reform, the most likely event to derail the average american that is doing everything right financially is a serious medical/health issue.

  45. CasperTheGhost says 13 October 2009 at 07:21

    I would state the formula for wealth as:


    This emphasizes the importance of time (aka compounding) in this equation. You can save a little for a long time and achieve wealth; or you can waste years acquiring stuff and frittering your money away and having to cut deeper, work harder to boost income in order to make up for the [TIME] you have lost.

    If you want to have a million dollars of wealth, you can either save $1 million for 1 year, or you can save $14k for 30 years at 5% interest.

  46. Credit Card Chaser says 13 October 2009 at 20:43

    To build wealth you must almost always spend less than you earn – the one caveat that I would interject is that if you are spending your money on appreciating assets and especially cash flow producing appreciating assets then it makes a lot of sense to actually at first spend more than you earn to build wealth (i.e. you borrow a million dollars at 12% interest to buy a business that will net you an ROI of 18% year over year then you are building wealth faster than you could without spending more than you earn because you are leveraging and using the bank’s money to build wealth).

  47. Sue says 16 October 2009 at 15:31

    Another important piece of advice is to have a like-minded partner when it comes to money and spending. If you’re not on the same page when it comes to your budget, the toll is not just monetary, but also psychological and emotional. The strain on your relationship may be irreparable, thus leading to a newer, bigger level of money problems if you divorce. One way to become and stay wealthy is to marry a stable partner with whom you can work jointly on your financial future and be sure to stay married.

  48. Matt@Self Improvement Resources says 19 October 2009 at 20:05


    Wow… is it that simple? 🙂 Yes! Unfortunately the financial services industry (that works for the banks that make money from “Loaning out money”) has made a job of convincing the public that it aint that simple.

    People always want a magical secret, because they don’t want to be disciplined enough to spend less money because… “WHAT WOULD MY FRIENDS THINK?” That is the mental prison.

  49. James Greene says 29 March 2010 at 10:37

    This article makes a lot of sense and I recognize a strong resemblance with my own situation. I would like to add a few suggestions in the hope that it helps other people. When I lost my (well paid) job, I was forced to reconsider my habits drastically. I made a plan to do this, rather than just cancelling subscriptions and buying cheaper milk. The first step that you absolutely have to go through is a deep analysis of your spending (a lot of calculations and not much fun). Where does your money go and how much goes there, and rank them. The next step is to find ways to reduce them. Saving on groceries doesn’t require the same approach as saving on insurances or heating. So I have started to write all the possible savings down and calculated for each saving how much I really would save. It took me 2 months to come up with 139 ways to save money, so it is a lot of work. You can finds tons of tips on the Internet to save money, and they all make sense, but how much do you save? Enough to spend less than you earn? In my case, I found out that my biggest ‘budget leak’ was food shopping. So I adjusted my buying habits and now I don’t look at the price of an item, but the price per ounce, pound, kilo, liter or gallon. The savings are incredible if you buy meat in bulk, and repacking it in reasonable portions and freeze them. All in all, I have saved 40% on my shopping bill. I can’t write down all my tips here, but a last advice is to write down what you spend and keep a continuous track of your finances. And try to do better than me, it would make me happy 😉

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