– Rule #1 – Spend Less than You Earn

Rule #1 – Spend Less than You Earn

Rules for a successful financial life are profuse. Lists of rules abound. Even the short lists are long. It is a difficult task, but I do my best to boil down the myriad of advice that is available to their essence – to the basic core behaviors that you must follow to lead a successful financial life.

Although I view many behaviors as important, there is one rule that is so basic, so indispensable, and so central to your financial success, that it inevitably rises to the top of any list I create.

That rule is “Spend less than you earn (10% less).”

This is the behavior that must underlie all other financial behaviors to lead a good financial life.

If you follow this rule – you will automatically be doing a lot of things right:
· You will not need credit cards.
· You will have the necessary emergency funds.
· You will be building your financial independence funds.

If you can learn to follow this one rule, you will be well on your way to living a successful financial life. Everything else is icing on the cake. If you do not follow this rule – almost anything else you do is wasted. I can’t claim to have invented this rule. It has been around for a long time and goes by many names:
– live within your means
– save 10% of what you make
– pay yourself first
– etc., etc., etc.

When I say “spend less than you earn”, I mean live on 10% less than your total income. This will allow you to save at least 10% of all money that you receive during the year for your future security and financial independence.

Here are Four Hints to help you follow this rule:

1. Make a commitment to yourself
Commit that you will spend at least 10% less than you earn and manage the money you save reasonably. Once you make the commitment, the details of how to do it will fall into place.

2. Make the savings automatic
Having to write a check to savings each month significantly decreases your chances of success. Find a way to automatically take the savings out of your paycheck before you see it: used automatic withdrawals, make automatic contributions to your savings plans (401Ks, IRAs, etc.). Do whatever it takes.

3. Forget the Joneses
Most of our problems stem from trying to keep up with the “Joneses” comparing ourselves to others – what we earn, what we have, etc. The Joneses have done far more harm to us than any of us know. This subject is addressed in great and interesting detail at: http://www.forgetthejoneses.com .

4. Learn to enjoy the simple life
We make life too complicated. Learn to enjoy the simple pleasures of life. Vacation locally, cook more, and go out to eat less.

What to do with that 10% you save:
You should be doing three things with money you save:
1. Build a liquid cash reserve so that you have money set aside for emergencies
2. If you don’t already own a home, start setting money aside for a down payment on a home
3. Begin investing money for your financial independence. After a few years, you will own a home and your cash reserves will be in place. From that point on, the entire amount you save will go toward building for your financial independence.

If you follow this rule, you will find that it will make incredible differences in your life. Make this change now. Promise yourself today to spend less than you earn (10% less). You won’t be sorry.

Steve Martin is the President of Martin Wealth Management, LLC, a Financial Life Planning firm located in Fort Collins, Colorado. He helps people design and implement financial plans that bring their dreams to life. You can reach him at steve.martin@mwm3.com .

– The Five Fundamentals of Financial Fitness

The five fundamentals of financial fitness:

1. Save at least 10% of your annual income
Begin saving to build a liquid cash reserve. Once you have achieved sufficient liquidity, direct savings toward balancing and building your portfolio. Savings also include retirement plan contributions.

2. Have sufficient liquidity
Most wage earners should have 10% of their annual income in a primary cash reserve (A1) and another 20% in a secondary reserve. Self-employed and retired individuals should build their cash reserves to an even greater level.

3. Fully fund your pensions
Take advantage of tax deferred savings plans, especially if your employer matches contributions.

4. Have the right size house
For most middle income Americans, your home is the most significant investment you will ever make. Buy a home 2 or 2 1/2 times your annual income, with a mortgage of 50% or more of its value. If the value of the home reaches 100% to 125% of your income, sell it and trade up again.

5. Pay off all credit cards and consumer debt
Learn the difference between bad debt, good debt, and acceptable debt. Avoid the bad, use the acceptable debt wisely, and take advantage of the leverage of good debt.

If we don’t change the direction we are going, we’re likely to end up where we’re headed.” –Ancient Chinese Proverb