How to Build Wealth, Part 2
Thursday, April 30th, 2009 | Uncategorized
Spend Less Than You Earn
Many personal finance writers like the mantra of “spend less than you earn”, but more than a few wish it could be reversed into “earn more than you spend”. They argue that by adopting a scarcity mentality you will spend your energy being a baggie-washing frugalist and never truly achieve wealth.
I agree, to a point. But before you can focus on earning more, you absolutely need to learn how to live on what you currently make. Otherwise, even with a very high income, you will end up broke like MC Hammer. Once you’re comfortable living within your means you can then switch the mantra around and focus on earning more.
Many people struggle with this step because it involves self-control and planning - two things at which human beings are notoriously bad. But it doesn’t have to seem like a sacrifice. Spending less than you earn is simply a matter of living one level below what you currently make. If you’re a billionaire, live like a millionaire. If you’re a millionaire, live like a hundred-thousandaire. If you make $50,000 a year, live like a college student.
Nor is spending less than you earn all about ascetic denial of the things you love. When you have a budget or a plan you can still enjoy your favorite things. If you are absolutely passionate about video games you can say to yourself “I am going to spend 5% of my income on video games”. In this way, you make room in your budget for what you love. As long as there is still an area in your budget for saving (for example, saving 10%) you can spend the 5% on video games with all the joy in the world. And can congratulate yourself because you’ve taken a step to building wealth without giving up what you love.
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