Spending Less Than You Earn Is Not Enough

Posted on July 29, 2009
Filed Under budget, emergency fund, savings | 11 Comments

Comments protected by Lucia's Linky Love.

I was reading a series over on The Simple Dollar on Trent’s 14 Rules of money. The first rule that he wrote about was Spend Less Than You Earn. It made me think about my own situation.

Two years ago, I began my journey to ‘fix’ my financial situation. I began reading personal finance books and blogs with a passion and one of the rules that I saw the most was “Spend Less Than You Earn”. While at first glance it seems like great advice, it was almost enough to make me give up. I was over my head in debt and my income was shrinking not growing. Obviously, spending more than I earned had gotten me into this mess.

Spending less than I earned every month was pretty much an impossibility. I had so much debt and so little income that every penny that I made had a place to go. When I wrote down my first budget, I was so far in the red that I couldn’t see black. How could I possibly spend less than I earned?

I look back now and realize that it was the first book that I read “The Richest Man In Babylon” which helped me the most. This book was written in 1926 by George Samuel Clason. It was originally a series of pamphlets that were handed out by banks and insurance companies. Clason’s firt rule was to “Pay Yourself First”.

Pay Yourself First

In other words, no matter how much you owe others or how much you spend, you need to pay yourself first by saving some of your money. Clason suggests saving 10% by spending only 9 out of every ten dollars earned. I always questioned this amount but I can tell you that 10% works. It is a small enough amount that if you put it into savings, you will not miss it. Even when I was barely making enough to live on each month, that $10 on every hundred was small enough that I didn’t miss it.

At first, I thought I would put whatever money was left at the end of the month into savings. I quickly learned that if I waited until the end of the month, the money ran out long before the month did. There was always an extra bill to pay or groceries to buy or that extra tank of gas to go someplace. There was never any money left at the end of the month. The habit of spending what I had in my pocket was so deeply ingrained that it left without me even realizing it.

When I started to put that 10% into savings FIRST even when I knew I was not going to have enough money to pay bills or buy groceries. Every single month that I put money into savings before I paid bills or bought groceries, I made my savings goal and somehow I managed to pay the household bills and eat. I didn’t pay all of the bills but I could not have paid them without saving anyway.

Now I know that many of you are thinking that you would have used the money that I was putting into savings to pay the debts. Clason’s second rule is to control your expenses and to learn the difference between needs and desires. Clason’s second rule is to control your expenses and to learn the difference between needs and desires.In some ways, I agree with you but I had come to think of my small emergency fund as my survival fund. If something went wrong, I would not be able to pay the essentials like rent, utilities and food without some small amount of money in savings.

Emergency Fund

My initial savings goal was $500 to be used for emergencies. It seems like a small amount but it took me almost 6 months to save it. I tried snowflaking money into it by selling things on eBay and on craig’s list. I saved my change and added it to my savings. All of it helped but in the end the only thing that really worked was paying myself first.

Eventually, my income grew and my debt load shrunk. It is now possible to spend less than I earn but that first lesson is still the one that governs my financial life. No matter what else I buy or pay, no matter what I have to give up, I pay myself first by putting that 10% into savings.

After 2 years, I still do not have the fully funded emergency fund (6 – 8 months of living expenses) that is recommended. I would like to think that I will eventually build up to that amount but I have enough to keep my head above water for a month or so.

Beyond Emergencies

Paying myself first has become more than just a tool to build my emergency fund. The emergency fund also doubles as an operating account. I do withdraw money from it for more than emergencies. There have been times when I have had to take money out of it to keep the farm operating. My goal is to only take money out for emergencies and to pay for something that will increase our income.

Clason’s third rule is to make your savings multiply. This can mean as little as earning interest on your savings by putting it in a savings account or cd but it can also mean using it to invest in something that will increase your earnings. While we don’t take money out of savings to buy things that we desire, I do not feel guilty about taking it out to take advanatage of opportunities.

We buy and sell horses for a living. We generally budget a certain amount of our income to buy more horses. Every once in awhile an opportunity to purchase a horse for very little comes along and if we didn’t have some savings, we would have to turn it down. For example, a friend recently had a horse that she needed to sell quickly. It was a wonderful horse, registered, well trained and very pretty. She wanted a little more for it than we currently had budgeted for restocking, however, I knew that we could easily make double or triple that amount when we sold her. I took the money out of our savings to buy the horse and sure enough I more than tripled our money on her.

For those of you who are not in business, there are many chances for investment. You might invest in a college course that will increase your earning potential or you might be investing in your own home. The important thing is to not only save 10% of your income but also to make that 10% work for you so that it increases.

If you are new to personal finance and struggling to get your head above water, don’t be discouraged by the advice to spend less than you earn. Try paying yourself first and you will soon find that you are spending less than you earn.

If you enjoyed this article, you may want to subscribe to my feed by RSS or get updates in email.

Comments

11 Responses to “Spending Less Than You Earn Is Not Enough”

Leslie@spillingbuckets (1 comments.) on July 29th, 2009 3:45 pm

“The Richest Man in Babylon” is a great book – short but with a lot of valuable lessons.
cindys on July 30th, 2009 3:15 pm

I agree, Leslie and it has been around forever. Most of the rules that he talks about are still relevant today.
Ms Save Money (7 comments.) on July 31st, 2009 7:15 pm

Great article – I think The Richest Man in Babylon is a great book to reflect your own personal finance.

Currently I’m spending far less than what I make and have a decent amount in my savings. I like that you were very bold about buying the horse and then reselling it to make more money. I’m at that part rt now where I don’t know what to do with my savings to double it – it’s just sitting in my savings account and earning only .20% APY. I know I can put it into a higher savings account – but I’m more or less looking into the opportunity of doubling my savings right away and not just over time.

Anyone with recommendations?
Denise on July 31st, 2009 10:52 pm

I still haven’t read that book but need and want to. I just have to find a copy at my price..free!
Good and practical suggestions in this entry!
Rondi (1 comments.) on August 1st, 2009 1:31 am

Great advice ’spend less than you earn.’ This definitely keeps you within your budget and out of debt. I will have to read ‘The Richest Man in Babylon.’ Thanks!
noclegi gory stolowe (3 comments.) on August 3rd, 2009 3:47 am

As I generally agree with your post I think that sometimes thinking that way is dangerous. Spending less than earning sometimes makes development slower – that is truth, but sometimes it can save your business. Everything we see around us (I mean the case of economical crisis) originally started with people who invested too much in things that could not give them profits. Let’s be honest – sometimes spending less money could be very profitable.
cd phi (12 comments.) on August 4th, 2009 8:57 pm

What if you’re using the money to pay down debt? I have an auto loan and school loans which I couldn’t avoid incurring, so I have to aggressively pay it off since I have a nice savings fund in case emergencies occur.
cindys on August 4th, 2009 9:33 pm

Cd phi, I would still save 10% and believe me, I still have debt that I am paying off but without saving, I would have to go into debt for all of these emergencies. My financial situation did not start to turn around until I learned that I have to “pay myself first” or I will never get ahead.
cd phi (12 comments.) on August 5th, 2009 7:25 pm

I see what you’re saying Cindys. Thanks for the response! My debts are actually quite manageable. Pay very little rent because I moved back home to save money, car payment, and student loans. Will be done paying off everything in two years at the current rate, and saving about 8% of my income.
Weekly Update: The Cheap Travel Edition — Almost Frugal- a frugal blog on August 9th, 2009 1:58 am

[...] Spending Less Than You Earn Is Not Enough @ Oh My Aching Debts [...]
Anita on September 16th, 2009 12:52 am

Hi, great article. I have yet another way to help: Spend slower than you earn. This means whatever you buy has to be above the rate at which you earn’t the money in terms of time. For example: Say you earn $5 per hr. Then what ever you buy at that price must give you a benefit for over an hour.