Spend less than you earn
“What’s your hot finance tip at the moment?”
Everyone is looking for that secret of the inner circle, the thing that no one else knows that they can act on and instantly become rich. They are looking for astounding insight and wisdom that could change their lives forever. And here it is…
Spend less than you earn.
The generations that lived through the World Wars and the Great Depression learnt this the hard way. Rationing was brought in under various guises by governments at the time, trying to manage scarce resources and curtail spending to ensure any savings could be invested in war bounds. So wrap your head around this – during World War 2, the rations assigned to each Briton per week included:
- 1 egg
- 2 – 3 rashers of bacon
- 50g butter
- 2 – 3 pints of milk
- 50g cheese
- 225g meat
- 225g sugar
Fruits and fish weren’t rationed, and of course were allowed to grow your own fruit and vegetable supplies at home to supplement the rations. At first some of these don’t sound so bad… until you break it down. The meat portion would be close to what most of us would serve at a single meal, so you would really only have meat once a week. We’d blow the sugar ration with a bowl of cereal with milk, two slices of bread, and a can of coke. So what was the by-product of rationing, aside from getting countries through the scarcity of war?
The key outcome is that an entire generation learnt:
- All things have limits;
- You may not always be able to get what you want or need;
- By paying attention to what you have and limiting waste, you can make a little go a long way; and
- The special things in life (birthday gifts, treats) can only be achieved by giving up a little bit of the day-to-day.
Essentially, you need to spend less than you earn.
With the advent of credit cards, leases and personal loans, suddenly we could put off the “pain” of saving for things we really wanted – new cars, overseas holidays, houses – until after we’d already enjoyed the item. Then we realised it didn’t just have to be big – ticket items that we bought with credit – we could buy all the little day-to-day stuff too! This is where things got really out of hand.
While we were purchasing one-off big ticket items, it was possible to manage the debt. You bought the item, like a car, used it and while you were using it you would be making repayments. You might then decide to upgrade your car; however, no one in their right mind would do that before the first car loan was paid off. It wasn’t necessarily the best way to go, but it was manageable.
When we started using credit for day-to-day items, we started to unknowingly live lives we simply couldn’t afford. And the gap between what we earned and what we were spending wasn’t one big ticket item, it was hundreds of little items. In fact, for many of us, there didn’t seem to be any perceived cost to these items, as using our cards came so easily and so quickly. Then, when we started to think it would be a good idea to curtail our spending, it became difficult to identify where, as each little thing on its own didn’t sound so bad.
And the credit card debt builds until the minimum payments on the card become more than you can afford each month. And here’s a tip – the minimum repayments aren’t designed to help you pay off the credit card. Even if you stop spending on the card, the massive interest will cause the debt to be an ever – present drain on your life and your hip pocket.
You have entered the credit-card-debt merry go round or, for some, the credit card black hole. Now, I imagine you are wondering why I gave you that personal finance history lesson. A couple of reasons really. First, if you aren’t already aware you are caught in the credit card trap, then perhaps this would highlight it for you. Second, I believe we need to acknowledge that, for most of us, we are actually living a life of plenty.
We have at our disposal great food, an awesome array of entertainment and, for many people, comfortable places to live. In World War 2 they frequently cut lighting to combat air raids, hot water was severely limited to save on energy resources, and they had fairly limited food rations. Yet, in these environments, not only did they survive, they remained pretty healthy and even managed to juggle their rations and limited income to put away enough to buy small gifts for each other. If they were able to do that in such an environment, then surely we could get on top of how much we earn, work towards spending within those limits, and then even manage to get to the point of having a bit left over?
Now, you might have noticed that I haven’t actually given you the “how” you are going to be able to spend less than you earn. Do not despair – the rules that follow will help that. One step at a time, folks.