Spend Less than You Earn: Rule 2

Spend Less than you EarnThis is Rule Two in my 10 Rules to Eliminate Your Debt and Change Your Life

Now that you’ve combined your finances with your partner (Rule One), it is time to get to work with your most pressing problem: your debt. The first step is learning to spend less than you earn.

Though this is the easiest concept to understand, it can be the hardest to master. In addition to being the hardest, it is also the most important.

Everything. Starts. Here.

That’s why we are going to start slowly and get it right.

Before we can get going on debt elimination, we have to plug the leaks in your boat. These leaks are the money you are spending each month beyond your income. And by income, I don’t mean your salary. Get used to thinking of your after-tax check as your income.

Some financial advisers want to push you quickly towards making a monthly budget. I believe you should wait and dedicate your first month to learning to spend less than you make, tracking your spending, and getting prepared to identify areas you can cut for major savings.

The easiest way to do this is to cut up the credit cards and live on cash. If you are used to living only on your credit card, you may not have enough cash on hand and it may take you more than a month to get “ahead” of your spending. While we are figuring out how to spend less than you earn, also build up a $1000 cash emergency fund. Focus on plugging the leaks first.

So for at least our first month of working towards a new financial life, we are going to avoid putting anything on credit, and pay cash for everything if possible. This is the only way you are going to train yourself to spend less.

Forget about the cash back rewards and airline miles from your credit cards. They are not worth it, and they aren’t working for you. Who cares if you earned  $10 cash back by spending a $1000 on things you probably didn’t need? This is not “savings” or income.

When I say “use cash,” this means skip the debit card too. There are psychological benefits to holding your week’s worth of money in your hand and knowing how much you have left after each transaction. This is part of getting out of the mindset of card swiping, which seems to defer the pain.

With spending, we need to feel the pain each time if we are going to get better.

Dave Ramsey recommends an envelope system for your cash budget (putting a certain amount each week in a Grocery envelope, Entertainment envelope, etc). Remember, for the first month we are learning what system works best for us. You can just keep it in your pocket if you want.

Be Prepared to Fail

There are going to be times in the first month where you fail. You may overestimate or underestimate spending in certain areas. This is okay; don’t let it derail you. We cannot allow “perfect” to be the enemy of “good.”

Remember, we are just learning to spend less during the first month. We are learning about ourselves, our spending habits, and what it is going to take to turn things around.

Don’t forget to record every expense, no matter how small. I got into the habit of saving every receipt and entering them into a spreadsheet. You can also use programs like Mint to track spending on your phone.

[Note: If you want a copy of the spreadsheet I use to track my bills and spending, email me through the Contact page on the left hand sidebar]

Be Prepared to Succeed

In addition to failing, you must ultimately succeed. You may lose a battle, but you have to win the war. If you end the month by racking up more credit card debt or spending more than you earned, then you cannot move on to the next steps.

If you are serious, you have to repeat this month over and over again until you figure out how to spend less than you are taking in. You will never be able to pay off debt if you are adding new debt.

Not to get ahead of ourselves, but we will be exploring in the upcoming 10 Rules posts ways to get big savings in our monthly expenses. Hint: we are going to aggressively attack your grocery budget and I may suggest you sell a vehicle or two. To prepare, discuss these ideas between the two of you and see what you decide. Even taking a loss on a vehicle and downgrading to a beater is a better choice than sticking with the expensive car.

Moving Forward

As I said before, living on less than you earn is what will get you out of debt. You can proceed one of three ways. Spend less. Earn more. Or both.

Bolstering your actions by selling things you don’t need or getting a second job are big wins that will put you ahead of the game.

Either way, take it easy your first month and don’t put a lot of pressure or expectations out there. Don’t try to do too much. We are figuring things out at this stage. But make sure you remember to succeed. Even if it takes two months to get your family on track, once you are there you are officially suited up for the game. If you aren’t able to spend less than you earn, you are still in the locker room and the game is going on without you.

To recap, your goals for your first month, Spend Less than you Earn, are:

Goal 1: Live on cash and have money left over at the end of the month.

Goal 2: Track all your expenses and make sure to pay all your bills on time.

Goal 3: Discuss big moves to free up money (second job, selling a vehicle, etc)



10 Rules to Eliminate Your Debt and Change Your Life

1. Combine Incomes, Finances and Efforts 

2. Spend Less than You Earn

3. Make a Monthly Debt Budget and Live by It 

4. Pay Off Debts Smallest to Largest, Regardless of Interest Rates

5. Make Big Changes for Big Results 

6. If You Don’t Need It, Sell It 

7. Save Monthly for Large, Anticipated Expenses

8. Set Aside Some Money for Fun

9. Pay Off Debts Before Investing 

10. The Goal of Work is Retirement 

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47 thoughts on “Spend Less than You Earn: Rule 2

  1. Personally I find that using cash only backfires for me. When I have cash in my wallet, I am much more likely to spend it. If I’m using credit cards most of the time, I avoid the unnecessary small purchases. It comes down to your own spending habits. If you cannot control your credit card spending, switching to cash only may be the better choice. Like Daisy, I do like the cash back that I receive on my credit card.
    Jeremy @ Modest Money recently posted..Buy An eReader & Save Money On BooksMy Profile

    • That is a interesting take, because it makes sense that some people would find it easier to avoid small impulse purchases because they have to put it on a card.

      That’s why I like personal finance – it’s not a one-size-fits-all thing.
      John recently posted..Spend Less than You EarnMy Profile

  2. I agree with some of your other commenters – cash only doesn’t work for me. When I have cash in the house, I spend it; doesn’t matter if I have $10 or $100 around. I am much more frugal with my credit card. I know I’m backwards, and I know what works for me wouldn’t work for everyone. Just pointing out that the cash system isn’t universal.
    Elizabeth @ Broke Professionals recently posted..I Want To Quit My Job: Leaving Work Without Burning BridgesMy Profile

    • Thanks for reading, Elizabeth. The important thing is figuring out what works in each individual household. People with bad spending problems would likely need a huge change like cash only, but once they take control, they could probably work back to a credit card system.

      But if they can show that they can spend less while still using a card, I’d tell them to stick with it.

      Thanks for weighing in.
      John recently posted..Best Personal Finance Writing – Week 7My Profile

  3. Paying with cash and tracking everything you spend it on helps a lot. I give myself a set amount of cash each week and try to end the week with some still leftover. I also use a credit card for most of my expenses and try to keep my balance below a target amount each month. Tracking all of this regularly really helps! -Sydney
    Untemplater recently posted..You Don’t Have To Be Famous To Be A RockstarMy Profile

  4. While reading through your post, I just knew the “pro credit card” commenters would come out of the woodwork. That’s why this is called “personal” finance though, and why I like this niche of the blogosphere so much. You never hear Dave Ramsey recommend that somebody continue to use their credit cards if it is working for them. Nice addition to this series John.
    Matt @ RamblingFever Money recently posted..Thinking About Money While Sitting on the ToiletMy Profile

  5. We use a cash back card, and envelope based budgeting. We also prepare to fail, and we always fail to prepare to succeed.

    the main thing it seems people forget about credit cards is that they are a tool, right for some jobs, wrong for others. Right for some people, wrong for others, right for some, oh never mind… ya’ll git the point.
    bax recently posted..Three Week ChallengeMy Profile

    • Thanks for stopping by (sorry for the delayed reply – damn spam filter got me again).

      Step 3 will be outlined next week, and you’ll see it is more of a debt budget than a spending budget. I do urge people to take a month to see where you are spending your money. Where to cut is pretty easy. It’s doing it that is hard.

      Thanks for your comment.
      John recently posted..Best Personal Finance Writing – Week 8My Profile

  6. I definitely agree that it might not be the best idea to jump right into starting a budget. You have to figure out what you’re spending on first, then improve on it, and then create a REALISTIC budget. The worst thing you can do to yourself is create an unrealistic budget..fail..and then you’re demoralized and feel defeated. Game over 🙂
    Kevin @ SpringCoin recently posted..Using Available Credit as a FallbackMy Profile

  7. John, not to get personal. You’re obviously Married and have, or have had, debt, but do you have a child? I like the simplicity of your rules and they would mostly apply to having a child as well, but I’ll warn anyone who’s willing to listen. From the time your wife gets pregnant there are lots of financial challenges along the way, and our daughter isn’t even two yet. These include the decreased income during maternity leave, increased expenses, whether or not your wife goes back to work full time or not, the decrease of income during paternity leave (if you choose to take it), etc. So to your point, it’s very important to get into the habit of spending less than you earn and to be able to make adjustments if/when your financial situation changes. Maybe a I should write a post about the financial challenges of having a child, or at least our experience…..
    TheDailyThinker recently posted..Government, Taxes and ServicesMy Profile

  8. You summed everything up nicely. It really takes a strong will and dedication to suffer through the ‘growing pains’ of a new debt/spending plan…. which is probably why congress hasn’t been able to come up with an agreeable solution to the US debt crisis. We as individuals must may a pact with oursleves and our spouses to endure the hard times and the labor needed to get to the ‘other side’ …. to a place of fiscal stability and responsibility.
    Joe recently posted..The Technology of Old MoviesMy Profile

    • Great analogy Joe. Getting our country on track would be painful for a lot of people, which means it will never happen. The best thing to do is treat your household as “the economy,” and worry about what you can control. Once you are debt free, you become less tied to what the bozos in Washington are doing.
      John recently posted..Permanent Portfolio: Safe, Stable and Simple?My Profile

    • That’s an idea I have in the works for a post – spending is more important than earning. Like you said, if the guy making $20k can live on $10k and save the rest, he’s wealthier than the junior lawyer making $150k. That’s why I love personal finance.
      John recently posted..SpringCoin Review (+3 Free Months!)My Profile

  9. Love this quote: “We cannot allow “perfect” to be the enemy of “good.” In my experience the first 3 months of making a budget an d figuring out the methods that work for you are the toughest. Staying motivated, refining your strategy and pushing through with the inevitable (small) failures is key to winning the larger war against debt. Every small failure brings you a step closer to success!
    Azra ReadyForZero recently posted..Ben’s Challenge, Week 7: Credit Score UpdateMy Profile

    • Definitely one of my favorite quote. Recently learned it was from one of my favorite philosophers – Hegel.

      I agree on the beginning being the toughest part. Thanks for weighing in from the perspective of someone who has helped people do this.

  10. This is really a no brainer, but unfortunately too many people don’t follow this very basic rule. This becomes very simple once you realize that you don’t need all the latest and greatest designer things and you can be very happy with just those things you need.

    • That’s the fun and frustrating thing about money. Succeeding is so easy to understand, yet so hard for some to implement. Thanks for your comment Mike.

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