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The most basic principle of personal finance
There are thousands of books and millions of articles written on the subject of money. How to get rich is a popular topic, and everyone has an opinion on it.
Making money is a complicated business, but there is one principle that’s more important than any other. In fact, just by following this simple rule, you’ll almost certainly do okay. Yes, some will do better than you. But you’ll be ahead of most of the crowd.
What is this magic formula? It’s as simple as this:
Spend less than you earn.
I have done this my whole life, and really it’s the primary secret of my financial success. Over the years I’ve made good decisions and bad decisions. I’ve had windfalls and losses. But I’ve never been even close to desperate financial trouble since the day I left university, no matter how little I was earning.
That’s because I’ve always put away a portion of my pay-packet. Over the years, these small amounts really built up until I had a substantial nest-egg. Once I had this in place, I could get into more sophisticated strategies.
Of course, for many people, taking on debt is a fact of life. This is fine as long as you understand the difference between good-debt and bad-debt. Simply put, taking on debt to buy something that will rise in value faster than the debt will grow, such as a house or a business is good debt. If the opposite is the case, such as taking out a personal loan to buy a car, this is bad debt.
Taking on good debt still fits the principle of spending less than you earn, as the value of your asset is growing faster than your spending on debt.
Spend less than you earn, and your finances are virtually guaranteed to end up in good shape. Do the opposite, and you’ll experience the nightmare of financial stress.
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