Updated on 12.30.15

The Number That Matters Most

Trent Hamm

Mind the 'gap' between what you earn and what you spend.

There are a lot of numbers thrown around in personal finance articles and books and videos. People talk about rates of return on investments, interest rates on debts and on savings accounts, and so on and so forth. In fact, there are so many numbers bandied about that it’s easy to get completely lost in a flood of them.

However, there’s one number that I’ve found trumps all others. It’s the one single number that indicates whether you personally will find personal finance success in the future. It’s also not that hard to find, either.

It’s the difference between how much you spend in a given month/year and how much you earn in a given month/year. That single number, which I have referred to as “the gap” in previous articles, says so much about the direction that your finances are headed. (Another way to look at this number is the increase in your net worth over the course of a month or year.)

Let’s say, for instance, that Person A and Person B both make $50,000 a year. However, over the past year, Person A spent $50,000 while Person B only spent $40,000. Which person do you think is most likely to find financial success in their future? It’s really not too hard to predict.

Furthermore, the bigger the difference between the two numbers, the greater the likelihood for success in the future. Simply spending a few dollars less than you earn is a good thing, but the person who spends a few dollars less and the person who spends $20,000 less are going to be on two completely different trajectories.

Why is that number so important? That number represents how much money you have left over at the end of the month or the year. It is that money that allows you to pay down your debts or save for the future. If you don’t have that gap between your income and your spending, you can never save for the future. The bigger that number, the faster you can get rid of your debts and the quicker you can reach your savings goals, no matter what they are.

The best thing you can do for your financial future is to simply make that number bigger. If you make that number bigger, literally everything else falls into place behind it – debt freedom, investing, and so on. They’re all secondary and they’re all made much easier by simply having more dollars to work with.

So how do you make that number bigger? There are a number of ways to do it, but they all fall into a handful of groups.

One is to simply spend less money. This is the avenue that many people dread because they often connect it with cutting back on spending in the areas of their life that they value the most. They think of their hobbies or their entertainments or their little perks. The truth is that the most effective ways to spend less money involve cutting back hard in the areas you don’t care nearly as much about.

Rather than trimming back on the delicious kind of coffee you enjoy each morning, just avoid drinking more of it and instead switch to generic laundry detergent (or make your own). Rather than cutting your Netflix account that you use for binge-watching on cold winter evenings, trim a premium channel that you never watch fron your cable bill – or cut your cable entirely.

Rather than cutting out that meal out with your wife every Saturday that you look forward to all week, move to a smarter plan with your cars that revolves around buying late-model used cars and driving them until they’re ready for the trash heap. Cut the areas you don’t care about as much and hold steady on the ones that you really do care about.

Another is to earn more money. This is something I discussed in detail just yesterday. Finding a way to earn more money, whether it’s through starting a side gig, getting a raise in your current position, finding a new job, or changing career paths entirely, makes it possible to live your life almost exactly as you do right now while also having more left over at the end of the year.

After all, if you spend $50,000 a year and only make $50,000 a year, you’re left with nothing, but if you bump your income up to $60,000 and don’t touch your spending, you have $10,000 left over.

Yet another is to do smart things with the remainder. It’s great to have that money left over at the end of the year, but doing something sensible with it – even if it’s not the perfect thing – will amplify the benefit.

Using that money to pay down your debts, for example, reduces the amount of debt that you’ll have to pay in the future. It reduces your future debt payments, meaning you’re creating a bigger gap in the future. Using that money to save for retirement in a tax-advantaged account, like a 401(k), actually reduces your tax bill this year, leaving more behind in your personal coffers.

When you start combining these efforts, though, is when you really start seeing some amazing benefits.

Take Bill, who makes $50,000 a year, spends $40,000 of it, and pays $10,000 in taxes (a 20% overall rate). Let’s say Bill increases his salary by 20% and cuts his spending by 10%. This means that he makes $60,000 and spends $36,000 of it, but he still has a 20% tax rate on his whole income, so $12,000 goes in taxes. Still, he has $12,000 left over.

But if he put $10,000 of that in a 401(k), he’d only have to pay taxes on $50,000 of his income, meaning his tax bill is only $10,000. That leaves him $36,000 to spend, $10,000 in retirement savings, another $4,000 to pay down debts, and the same old $10,000 in taxes. Bill is in a lot better shape than before!

As easy as it seems, though, the thing to remember is that it all rests on your own personal choices.

You have the power to choose whether or not to keep your spending in check. Are you going to avoid the temptation to keep inflating your lifestyle? Are you going to be content keeping your spending on the best things in your life under control?

Or are you going to see every dollar saved in other areas of your life as another dollar to spend on an ever-inflating desire for more and more “fun” stuff in life? Are you going to choose to overstuff your life with more pleasure than you can ever really enjoy while simultaneously draining your bank account and leaving you with no resources for the future?

The choice is yours.

You have the power to decide to spend less on the things you don’t really care about. Are you willing to try out generic versions of the things you don’t really use? Are you willing to drive an older car for a few more years? Are you willing to live in a smaller house or apartment where you only really give up storage space that would be used to store stuff that you never use?

Or are you going to throw money at things you don’t really care about to impress people that you don’t really like or care about in any way? Are you going to keep buying the shiny things because the logo on a box makes you feel better? Are you going to toss money towards purchases to impress people on the street that you’ll never see again while your own financial future becomes more and more bleak, step by step?

The choice is yours.

You have the power to opt to spend more time and energy improving your earnings. Are you going to spend some of your time and energy building up a freelance income stream in your spare time? Are you going to put some effort into building a business? Are you going to spend time and energy genuinely bolstering your resume and building toward a promotion or at least a raise?

Or are you going to spend your hours at work reading websites that make you laugh or posting funny jokes on social media? Are you going to coast by at an easy job that still leaves you worn out but doesn’t really afford you the ability to move up and earn more?

The choice is yours.

The question really is this: are you going to keep doing things the way you’ve always been doing them and somehow hope for better results?

Or are you going to put your trust in your ability to build up that one central number in your life, the one that spells out the reality of your financial future?

The choice, my friend, is yours.

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