I am often asked what kind of personal finance lessons I’m teaching my children. I think many people hope that because I’m a personal finance writer who churns out tens of thousands of words a week on personal finance topics, I’ll magically have some special insight that will teach their children how to be financially responsible.
The truth is that whenever you teach children anything, your best approach is to break it down to the basics. Focus on the absolute core of what you want to teach them, hammer that core into place, and then add details to that core as needed.
I’ll give you a very clear non-financial example, right off the bat. Our advice – and our rules – for personal behavior boil down to two key things. One, treat everyone else as you would like to be treated, and two, don’t do anything today that would hurt your tomorrow. No matter what situation they run into in life, we run it through those two key principles and help them to understand what the “good” choice is and what the “bad” choice is. It’s a very simple pair of moral rules that they can apply now and that they can apply later in life.
What about personal finance? For that, it comes down to one simple rule: Spend less than you earn.
Everything a person really needs to know about personal finance comes from some form of logical conclusion from simply spending less than you earn.
It really is just that simple. That is the one core personal finance message I’m drilling into my children.
Over and over again, as we enjoy good things in our lives together, I remind them that much of it is possible because Sarah and I choose to spend less than we earn, all the time.
When the children are able to enjoy days together with Sarah and myself during the summer that would be impossible for other working families, we tell them this is possible because Sarah and I have consistently spent less than we’ve earned over the years.
Whenever our children receive money, we encourage them in a very direct way not to spend all of it at once and to put some of it aside for the future. We allow them to think about big future goals and to use that money to ensure those goals come true. It’s all about spending less than you earn.
Whenever we take them to the store, we show them the choices we’re making as we buy generic items and bulk items. Those choices save us money because we use a frugal mindset, which is just an inevitable result of a “spend less than you earn” core philosophy.
It’s the single financial rule that brings balance to my life, and it’s the one thing I want to instill in my children more than any other when it comes to money. It’s also the core idea behind my ideas and writings here on The Simple Dollar – all of it is just an extension of that central principle.
Let’s walk through how that simple rule can help you make good decisions in almost every personal, professional, social, and financial situation.
Having a Natural Cap on Your Spending Naturally Encourages Budgeting and Smart Money Choices
It’s simple. Your cap is how much you earn in a year minus the amount you need to save to secure the future you want. Period. That’s all you have to spend. It doesn’t matter how much credit exists in the world – you’re not spending more than that.
What people often do instead of that is ignore the amount they need to save to secure the future they want. Instead, they spend as much as they earn or more to live an affluent lifestyle right now.
That’s a bad mistake according to the “spend less than you earn” principle. You do not know for sure how much you will earn in the future. Because of that, spending everything you earn right now means that if something unexpected happens and your earnings drop – or, worse, disappear – in the future, you’re going to be in a serious pickle. You’ll have some serious life changes, destroying much of what you hold dear.
Spending as much as you earn is much like living in a house of cards. If the wind blows the wrong way, some or all of it will collapse.
It’s worth remembering that your future self is not a reliable entity. Your future self is going to be older and be facing all of the challenges that growing older brings. Your future self might experience great fortune… but your future self might not at all.
Spending less than you earn and saving the difference is key. In fact, you should start with the saving and merely live off of what’s left afterwards. That way, even if the winds of change interrupt your life in the future, you’re still in good shape and can tolerate a lot of change without any real disruption.
In other words, the simple “spend less than you earn” philosophy, coupled with a bit of observation about life, points you to a pretty clear personal finance pattern. Take some of your income, put it aside for the future as the highest priority (because your future self isn’t reliable), and then live off of the remainder.
This is essentially a very simple budget with two categories – “saving for the future” and “living now.” From there, it’s pretty easy to start breaking down “living now” into more categories to give yourself a clearer grip on where that money is going.
Having Personal Stress Over Money and Career Issues Largely Vanishes
If you live consistently by the “spend less than you earn” principle, you’re eventually going to eliminate your debts and build up a buffer in your savings account and investments. That buffer is vital.
First, it causes you to be far less stressed out about day-to-day financial issues. If you have little or no debt and a healthy buffer in your checking account, it’s hard for short-term financial situations to really bother you too much. If you have money in investments as well, fewer and fewer things can really disrupt your situation.
Second, as your finances grow, your worries about other aspects of your life, such as your career, start to melt away, too. When you reach a point where you could easily enjoy a nice life for a very long time from your savings or with the addition of an income from a minimum-wage job, it’s pretty hard to feel as though your back is to the wall at work in terms of your paycheck. I refer to this as “breaking the golden handcuffs.”
Third, you begin to worry less about your family’s future as well. If you have money in savings and investments set aside for your child’s education and are properly insured, it’s pretty hard to be very stressed out about their future. It’s taken care of well into adulthood.
Finally, you’ve eliminated the number one source of conflict in most marriages. Couples fight over money. That’s just the truth of the matter. By committing to a sound core financial principle together and sticking with that principle for a while, you end up in a situation where there’s really very little to fight about.
With these sources of stress minimized or eliminated, it becomes natural to feel a lot less stress in your life – and that feels tremendous. On a daily basis, low stress makes you feel better about everything.
On top of that, lowering your stress has a profound positive impact on your short term and long term health. Stress is one of the most profound sources of health problems in people, as it causes all kinds of different health problems, particularly if the stress persists.
Simply living by a “spend less than you earn” philosophy wipes away one of the biggest sources of stress in modern life, which helps your enjoyment of daily life, improves your core relationships, and improves your long-term health prospects, too.
Cultivating a Frugal Mindset Makes “Spend Less Than You Earn” Far Easier
A few days ago, I wrote an article on the topic of developing a frugal mindset. A frugal mindset, in my eyes, is one in which you feel as though the frugal choice is the natural, smart, and strong choice, and the expensive or extravagant choice is the unnatural and poor choice. (It’s worth noting that I define “frugal” as being a state in which you’re getting the greatest benefit possible for the time, money, and energy one invests in something.)
If your mind naturally works like that, then making smart spending choices becomes the absolute norm in your life. It stops becoming a matter of “denying yourself pleasure” or “making boring choices.” You’re flat-out making the best choices available to you because you’ve spent time really considering all of the consequences of your choices and you recognize that, almost all of the time, the choice that requires less financial expense is the one with the most overall short-term and long-term upside.
In other words, if you truly subscribe to the concept of “spend less than you earn” at the core of your finances, it makes a ton of sense to cultivate a frugal mindset.
That takes a lot of time and effort, don’t get me wrong. Even now, I still do things like visualizing myself in tempting stores making the right choice so that when I actually am in that tempting environment, I make good decisions.
Natural Appreciation of Things for Their Non-Financial Value Becomes the Norm
Another powerful consequence of truly living by the “spend less than you earn” mantra is that you begin to genuinely appreciate things in a different way.
For me, it takes the form of recognizing that on some deep level, an expensive item or experience has an inherently negative lining. No matter how great that thing is or that experience is, on some unconscious level, I inherently realize that I am now without that money, likely forever. That’s puts a gray twinge on expensive things.
Because of that, my appreciation for other things that do not have that negative twinge has really grown over time.
I’ve come to appreciate that there is literally an infinite number of things to do and enjoy out there without spending much money. That vague sense of “gray” that hangs over an expensive activity or purchase for me pushes me gently toward trying out free and inexpensive activities and items.
I’ve come to appreciate being in the moment when enjoying an activity. The thing is, it often doesn’t even matter what we’re doing. I can have a great laugh with friends sitting around literally doing nothing at all. I’ve come to realize how great I feel when I push myself into the moment when I’m doing something with people I love or engaging myself physically or mentally in some deep way – or doing something as simple as admiring the world around me.
I’ve come to appreciate the relationships I have with people, which can’t be bought with money. They can only be built with time and care and love and thoughtfulness. (I’ll talk about this more in a bit.)
I’ve come to appreciate time far more than money. The enjoyment of spending an hour or two without worry, just sitting there reading a book or going on a bicycle ride to the next town over or playing a board game with my friends or making homemade waffles with my children… those kinds of activities fill me with pleasure. They cost time and energy, but they don’t cost money, leaving that money around to protect future moments like these.
All of those appreciations are borne from that simple rule. Spend less than you earn.
Focusing Your Career on What Empowers and Excites You, Rather Than on What Simply Earns the Most Money Becomes the Norm, Too
If I have one regret in my entire life, it’s that I let financial choices dictate my academic decisions in college.
Because I truly bought into the idea that the best things in life can only be bought, I looked at my career options strongly through a salary lens. There were several areas that I wanted to study – mathematics, English, philosophy, history, genetics, computer science, political science – but I wound up choosing a field not so much because of what empowered and excited me, but because of what would actually earn the most money.
Even then, I didn’t appreciate the lessons of spending less than you earn. I didn’t understand that a person creates their own joy and that expensive stuff doesn’t create joy at all. I didn’t understand that the best things in life really are free, as trite as it sounds.
By 2008, I realized that. I walked away from a job that I loved, but one that was adding a lot of stress to my life, to fulfill a personal dream of writing for a living. It’s still something I’m doing today and it brings me quite a bit of personal fulfillment.
If I had it to do all over again, I’m not sure what I would do, but I know that I wouldn’t strictly follow the money. I’ve learned that if you’re truly passionate and committed to something, you’ll probably be successful at it (or something highly connected to it) no matter the field and earn enough to make a living for yourself.
The key is to love what you’re doing and be realistic that you might have to be a little creative when it comes to making money at it. However, if you truly adopt a “spend less than you earn” philosophy as a core principle in your life, that’s more than possible.
Building Relationships That Demand That You Tap Yourself Financially Become a Drain on Your Life; Other Relationships Then Move to the Forefront
When you look at the various relationships in your life, you see some of them as being very positive and some as being a mixed bag. You probably also have a few negative ones.
Every healthy relationship demands some things from both people involved. Time. Effort. Money, perhaps.
Friends who regularly make requests that require you – and usually both of you – to tap your finances regularly tend to shine less in my life. Over time, I tend to de-emphasize those friendships and emphasize other ones.
Friends that require you to spend money? Think of friends who insist on going out to dinner or out on the town regularly, for instance, or other friends who planned a “destination wedding” and insisted that you attend or other friends who constantly beg you to buy their network marketing products.
I don’t mind going out with friends sometimes, of course, but that should be one option among many and is something that we do irregularly. If someone suggests not spending money, that suggestion shouldn’t be shushed. I shouldn’t have to buy things to maintain that relationship, either.
Why? In the end, it’s the time and energy that really matter in a friendship. Those are the things upon which a genuine friendship is built. If you take that perspective, friends that encourage or require you to spend money in an unnecessary fashion are actually taking away from your life for no real reason, as a good friendship doesn’t require you to spend money.
If you live by the principle of spending less than you earn, that truth shines even brighter. Friends that require spending money to maintain that friendship by constantly going out or constantly buying stuff are demanding that you restrict your freedoms and options in other areas of your life just to keep that friendship. To me, that’s a real downer, especially since there are many people in my life that don’t require that kind of spending.
At this point, most of my friends have the same philosophy. They suggest doing things that don’t require spending much money. Those are the friendships I have cultivated over the last decade or so, both actively and unconsciously.
Other friendships – the ones centered around spending, constantly going out, selling each other network marketing goods – I allowed to slowly fade away, both actively and unconsciously. That’s because, by genuinely living by the principle of spending less than I earn, they were putting a squeeze on areas of my life in a way that did not make things easy, either in the short term or the long term.
Almost every financial and professional strategy you can imagine grows from deeply and truthfully applying that one simple maxim in your life.
Spend less than you earn.
It ricochets through all of your spending choices. It guides your career decisions. It helps you define many of your relationships. It offers a great template for choosing how to spend your spare time. It gives aid to your mindset and how you appreciate the various things in your life.
In short, it’s a powerful guiding principle for your life as a whole, one that deserves to be on a very short list of principles.
For me, those core principles are six in number.
Spend less than you earn.
Treat others as you would like to be treated.
Don’t do something today that you’ll regret tomorrow.
Just keep living, no matter what falls in your path.
Give a little of yourself freely and expect nothing in return.
Spend your time stretching your brain or your body, and if you’re too tired to do either, sleep.
These principles have guided me well in life. Virtually everything I do in a given day is centered around those principles, and most of the time I’m following most or all of them at once. They provide straightforward guidance for almost every situation.
As for my money? Spend less than you earn is truly at the core of it all, and that principle bleeds into the other parts of my life as well. Hopefully, it can do the same for you.