Friday, June 8, 2007

Rule #1: Spend Less than You Make

Plan the Work. Work the Plan.

Before builders break ground on a new home, what do they do? They study the blueprints and make a plan for how to move forward. They don't just start building walls wherever seems like a good place! The same applies to our finances. Before you can start getting out of debt, saving, investing, and preparing for your future, you have to have a blueprint -- a plan of how you are going to get where you want to go. At the heart of this plan, there is one simple, but critical thing that must happen. It is so simple that a 3rd graders understand it, yet adults of all ages seem to forget. That rule is this:

Spend less than you make.

It is that simple. Spend less than you make.

Now I know you may think that advice is ridiculously simple and far below your intellectual level. But consider this…the average American has $9,000 of credit card debt, and that number gets higher every year. How does that happen? It happens by them spending more than they make. In other words, they have more money going out than they have coming in. Those may have been big purchases, or they may have just been lots of little ones, but it adds up just the same.

It is often so easy to forget how fast small purchases can add up. A cup of coffee, a dinner out, a trip to the movies -- none of these by themselves are big expenses. But put them together and they add up quickly. I'm sure any of us who use a credit card have experienced the feeling of looking a string of small charges and thinking "Those charges can't possibly add up to this balance!" Even I have been guilty of breaking out a calculator (ok, I admit it is more likely a spreadsheet) and double checking the figures. Over a month, small charges can add up to one giant number!

So how can we handle this situation? We have to make a plan, and we have to stick to it. Then at the end of the week or month, we can compare how our spending compares to our plan, and make adjustments as necessary.

Before you can take control of your financial life, you first need to know where you are. Think of this as a doctor examining the patient before prescribing a method of treatment. So before we can get started with a plan, we first need to do an examination.
We will start our examination with three basic questions. They are:
1. How much money do you have coming in?
2. How much money do you have going out?
3. Where is that money going?

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