Today, we’re looking at the 2nd section on Page 8 in Chapter 1 of Dave Ramsey’s Complete Guide to Money. And here’s my lesson for the day:
Never, ever, spend more than you’re making.
Chapter 1, titled Super Saving: Common Sense for Your Dollars and Cents, continues on Page 8 with priority number one, which is to ‘save money.’
Here, Dave takes us back to the years leading up to the 2008 financial crisis. And I can’t help but compare those times to the latest covid crisis in 2020, with similar or even more far-reaching aftermaths.
In the years leading up to the ’08 financial crisis, people were using debt to prop up their lives.
They were making some money all right. But then, when it came to time to spend, they spent everything and then took out more in risky loans, credit card debts, and were just too financially exposed to loan sharks out there.
So that if an emergency happens, a lot of folks will be unable to tap their savings for a few thousands of dollars (say $5,000), and would have to borrow even more… which means even more debts and more loans.
Tell you what:
When people say life happens, they mean emergencies happen. That is, things happen that we never expect.
We can hardly stop life from happening to us… it’s just the price we pay for living.
BUT, we can control how we respond when life happens to us.
And one of the biggest ways to do that is to be able to financially counter the emergencies with a bang… whether that’s coming up with the needed cash for a car issue, a leaky roof, a flooded basement, a health emergency, an injured knee, a crashed laptop, and on and on.
So how do you prepare yourself to be able to financially counter with a bang?
By saving money. Specifically by always spending less than you’re making.
So that you can keep the balance in your savings, that you don’t touch for your everyday expenses.
- Knowing how much your final take-home pay is
- Knowing the cost of your essential expenses: rent, food, transportation, electric, medical, and internet
- Deducting those essential expenses from your final take-home pay
- Aggressively cutting out other expenses that you need to cut, and
- Saving the rest
And for every additional item that you add to that list of essential expenses, ask yourself: is this really essential?
- Maybe you can skip that $9.99 Spotify monthly subscription fee
- Maybe you can cut that cable and watch YouTube instead
- Maybe you can share an apartment with two other roommates
- Maybe you can cook at home, so you can eat healthy and also have leftovers saved for other meals
- Maybe you can reduce your internet speed or stop renting your router so you can reduce your internet bill
So that, by aggressively cutting your expenses, you’re at least spending exactly what you’re making in final take-home pay.
Now I’ll be honest: your real goal is to save a whole lot more than you’re spending.
But, to get started, you’ll need to do EVERYTHING you can to make sure you’re not spending more than you’re making.
Because here’s the deal: To build wealth, you simply need to have a lot more money coming in and staying in, than going out.
Which means, building wealth means you have multiple streams of income for you, and as the money comes in, most of that money stays or even multiplies and yields more.
That’s the basic principle behind building wealth.
Of course, there are other questions on: what type of income stream to work on, or how to multiply the money when it comes in.
But, staying on the main lesson for today: You’ll never be able to build wealth or achieve financial freedom if you spend more than you’re making.
It just doesn’t add up mathematically.
If you truly want to put money in its place, and let money work for you… instead of the other way around, then start with this: never spend more than you’re making.
And this applies, if you make only $5,000/year or $500,000/year.
Life will happen, no question about that.
Here’s the real question though: what are you doing now to prepare for when life happens?
Because even though financial freedom means that you keep a lot of what you’re making, a good first step to start with: is to at least not spend the money you don’t have.
Or put another way: To never, ever, spend more than you’re making.
That’s all for today, my friend. We’ll continue in the 2nd section on Page 9 of the book tomorrow.
See you then.