Spend less than you earn and save/invest the difference. These 10 words are the simple secret to lasting and guaranteed wealth. Unfortunately, however, the developed world lives according to the complete opposite of this simple secret: spend more than you earn and borrow the difference.
The primary reason for the terrible trends shown above is the widespread culture of consumerism that has taken over Western civilisation. We have been completely duped into believing that ever greater amounts of consumption will bring status and happiness and, as a result, developed world citizens have morphed from net-producers into net-consumers. Now, after several decades of binging, we have to start facing up to some serious economic consequences.
So, how do we turn this around? Well, luckily the solution is blindingly obvious: simply follow the 10 word secret above (spend less than you earn and save/invest the difference). This is easier said than done in our total consumer society, however, and we will need a sound strategy to make this practically possible. And yes, as with everything else in the One in a Billion strategy, we will do this by simply creating an environment within which saving happens automatically.
This can be done in three simple steps:
- Decide how much you can save. This really should be at least 10% of your disposable income, but preferably more. If you think you cannot manage 10%, do it anyway. You can always undo this later on (although you probably won’t).
- Set up a separate savings account and ensure that the amount mentioned above is automatically transferred to this account each and every month. This account will have only one purpose: investment, and must never be used to fund daily living expenses.
- Destroy each and every credit card you own and make your daily purchases with cash or a debit card. Debit cards emulate the fantastic convenience of credit cards, but, if you ensure that you checking/transactional account does not allow for overdrafts, they make it impossible to go into debt.
At first glance, this setup might seem like self-deprivation, but that is most definitely not the case. You see, when you start spending more than you earn (and take on debt in the process), you encounter this little thing called interest. And yes, paying interest on consumer debt is equivalent to flushing money down the toilet.
The Consumer Credit Counseling Service says that UK families spend a quarter of their disposable income left after paying regular bills only on interest payments. If not for consumerism, much of this 25% could be used to buy something useful (or to save).
Living beyond your means is therefore a losing proposition all the way. The simple three-step system described above is the foundation for breaking out of this rut and will be extensively built upon over the rest of this post-series.