Easy to say. Not so easy to do.
The ‘not-very-secret’ mathematical formula for creating wealth and achieving the future you’re hoping for is not a complicated one.
Here we go…
“To build long term wealth, you need to consistently spend less than you earn.”
Sorry if you were expecting something more, but this is the unexciting and simple truth.
Spending less than you earn sounds easy. But if it’s so easy, why is it that so many people battle to consistently make this mathematical exercise work?
To answer this question, we’ll break it up into its two components:
“spending less” and “earning more”
We discussed how to draw up a financial plan in ‘Plan’ is the new Budget; the idea of working out your monthly difference and appreciating its cumulative effect over time. This shows how a seemingly benign monthly shortfall could become an unmanageable annual peril.
We stressed that a regular shortfall is not sustainable, and needs to be nipped in the bud. We discussed drawing up a financial plan to help you make this happen.
Addressing this half of the ‘wealth equation’ is perhaps the easiest to do in the short term. Assembling a plan to curtail your use of a credit card and manage your impulse spending can be achieved with a relatively small degree of self-control and self-awareness about where you spend your money.
The unfortunate thing is that there are only so many costs to spend less on and only so many practical ways to reduce your monthly costs. Once you’ve hit your limit on how much you’re willing to cut, you have to start focusing on ways to grow.
Earning more is the side to the wealth equation that offers unlimited possibility. The only limit on earning more money is you. This starts overlapping with something we will discuss in the not too distant future; the value of you. Your ability to earn an income is likely the single most valuable asset you possess.
Your best chance to create wealth over the long term is to strive not to “spend less than you earn”, but to rather “earn more than you spend”.
This flips the equation on its head and turns this entire pursuit from a race to the bottom for the cheapest cost of living, to one in which you value ‘brand you’ and work your ability to earn an income, with the ultimate goal of having enough to live the life you really want.
To believe from the start that your ability to earn an income is capped and focus only on reducing your expenses will limit your ability to engineer your wealth equation. We’re not saying that you need to necessarily work two jobs, as this might mean you put money in charge.
No, this is about positioning yourself to look for opportunities to grow, to add to your skill-set, polish your reputation, explore your entrepreneurial side and let the side of you that wants to ‘make things happen’ loose.
Spending less that you earn; it’s all about you
Consistently engineering a positive difference over the long run will create savings and in turn, wealth.
Institutions can offer you products and services which play a crucial role in your financial future, but they cannot spend less for you, or pay you a thirteenth cheque. They have a very valuable role to play in the personal finance space, but their job is not, and cannot be to make you wealthy. That’s your job!
Spend less and make more. Easy to say. Not so easy to do.
Article reposted with permission from Take charge of your money.