Spend Less Than You Earn
This is a fundamental rule in personal finance. Any personal finance book that you read will indicate this. It is the only way to generate savings, as this is the definition of savings; your income must be greater than your expenditure. The ‘gap’ as the image above indicates, is your savings and the goal is to make this gap as big as possible. It is this ‘gap’ that you will eventually put to use, in retirement accounts, 529 plans, investment accounts, real estate, savings accounts and so forth, that will eventually work for you. This ‘gap’ plus the power of compounding will allow you to achieve financial security, by your own definition.
What are we to do now?
The first step to take is to start tracking our expenses. How else would we know what how much our income and expenditures are? Therefore, to increase the ‘gap’ or savings, we would either have to increase our income, or reduce our spending. Tracking both helps us to know what falls in both those categories.
I recommend Mint.com or Quicken Online, now that Microsoft Money is no longer being supported by Microsoft. I have tried both applications and they are both great. There are others as well, so use one that you are comfortable with. I prefer Mint.com.
Thank you for Trent of the Simple Dollar for allowing the free distribution of this e-book. For the entire e-book, click on link below.