Rule #1 Spend less than you make
This is so basic you would think it’s a no brainer, but it is critical to financial success. Now I don’t think that people actively attempt to live above their means. It’s not like people wake up one morning and say, “Let’s see if I can spend $2500 this month even though I only earned $2000.” I’m convinced that most people have no idea if they are spending more than they earn or not. Keeping track of how much you spend is a big pain and it’s so much easier to just spend it if you have it. This is yet another case of people failing to plan, rather than planning to fail.
The interesting thing is that our society has set things up so that as long as you are able to make the monthly payments on this overspending there is no negative feedback. You won’t realize that you are making a huge mistake that over the next 20 years will leave you destitute and dependant on the charity of others. Credit cards make it easy to borrow more than you should and allow you to think that you are doing well if you can make the minimum payment, this is just wrong.
I love my Credit cards as much as the next guy. They allow me to do lots of great things, but if you are not absolutely sure of your spending it is very easy to overspend and not realize it until you are in a hole. Easy credit is very convenient, but it used without thinking it will kill you. Being able to borrow money on a moment’s notice is a powerful concept but it is also ripe for abuse, and as far as I can tell more than half of the people out there use it incorrectly, this is expensive and a really bad idea.
So how do you tell if you are in trouble?
The best way is to keep track of exactly what you are spending and what your income is and compare the two numbers, more on easy ways to do this soon, but if you cannot do that here are a few danger signs.
- If you don’t pay off all your credit cards each month.
- If you don’t save 10% of your paycheck (in non retirement accounts) in a typical month.
- If you borrow for anything unusual and more than $100 or so such as repairs, furniture, vacations, etc.
I would expect that more than half of the people reading this are spending more each month than they earn. It’s a huge problem and until you figure out how to either earn more (unlikely) or spend less you will never be able to get out of living on the edge of financial ruin.