Spend Less Than You Earn

This week's financial class was one that seemed pretty basic on the surface, but when you start digging into it, you find it's really not that easy. We learned four principles:

1. Spend less than you earn
2. Avoid the use of debt
3. Build and emergency fund
4. Set long-term goals

Clearly, all of these are inter-related: If you can't spend less than you make, it makes it hard to avoid debt and build an emergency fund. When looking for practical advice, I recommend the book The Richest Man in Babylon by George Clason. It's half a how-to book and half a story book. There's a bunch of short stories, and each one has a clear, practical tip. Though, in all honestly, I think it's more a mindset than a lack of ideas. Once you decide to get out of debt, you will figure out ways to do it on your own.

So, I would follow Stephen Covey's advice. In his book, The 7 Habits of Highly Effective People, one of Covey's habits is to "Begin with the end in mind". I like doing this because it helps to focus on what's important. So, I recommend setting long-term goals first. Give yourself a purpose to get out of debt. Once you have that - and truly want to achieve that goal - you will begin spending less and saving more.

Your goals will obviously depend on where you are in life and what your priorities are. So, think of the following suggestion as a primer for some possible goals.

• Pay off your house.
• Save enough money to send your kinds to college.
• Contribute $5,000 to a mission organization over the next 10 years.
• Pay off all credit cards.
• Contribute $4,000 each year towards retirement.
• Save $20,000 for a down payment on a rental property.

Think broadly and pick things you really want. My mom wanted to be able to take the whole family on a nice vacation every 5 years. She would save around $100 each month which generally would pay for all 5 of us. Two years before it was time, she would start to ask us where we wanted to go. A year before it was time she would start actually making plans. By the time we went we had most of, if not all of, it paid for. Now, that is a savings plan anyone could get excited out.

As a final thought, I'll leave it to SNL. Then next time you're thinking about spending money you don't have, picture this: (hulu.com)