The Key to Financial Success

Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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What makes someone financially successful? Is it their intelligence? Is it a large inheritance? Is it timing the market? Is it “a small loan of one million dollars”? Actually, it is so much simpler than this. Are you ready? Spend less than you earn.

That’s it.

If you spend less than you earn you are guaranteed to be financially successful. Let’s take two simple case studies to illustrate this point. Jim makes $100,000 and Karen makes $50,000. Who is richer? Jim right? Not necessarily.

Let’s say Jim is a typical American. At middle age he will be about $135,000 in debt. And that is consumer debt. This means that Jim probably owns the biggest house he could get a loan for, drives a new vehicle, eats out often, and general spends whenever he feels like he wants something. Most people do. If he is 45 and started accumulating consumer debt at age 18 then he accumulates roughly $5,000 in debt every year (45 – 18 = 27 years then 135,000 / 27 = 5,000 dollars in debt per year). That means that Jim spends $105,000 per year and has less money every year (how much money/assets a person has is called a net worth by the way).

Karen on the other hand is a more financially savvy person. She makes $50,000 but she lives in a modest apartment, drives a used vehicle, doesn’t eat out often, and in general lives a frugal but comfortable life style. She spends half of her income and saves or invests the other half every year. That means that if she is also 45 she will have saved $675,000 (27 years x $25,000 = $675,000) and that doesn’t include interest!

So who is richer? Obviously Karen. It doesn’t matter how much you make, what matters is how much you spend. The key to being a financial success–Spend Less Than You Earn!

What are some things that you think you could cut back on? What steps do you think are most important for spending less than you earn? Let me know in a comment.

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Definitions

Consumer Debt: Debt accumulated from spending on wants. Wants include things like eating out, entertainment, but also fancy cars and furnishing a fancy house; wants don’t include things like student loans, medical debt, or a mortgage.

Assets: Things that put money into your pocket every month (or year). Sometimes equity in your house is also included as an asset, but I prefer not to include it. A car loses value every year (depreciates) so it is NOT an asset.

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