Principle #3: Reduce Expenses to 75% of Net Income
June 29, 2012 § 3 Comments
For the first two principles we were in data acquisition mode. The sole purpose of Principle #1 and Principle #2 was to figure out what your financial situation looks like. You may have found out that you are doing great and reaping monetary gains each month; or you may have found that your spending is out of control, and you need a change. Well, buckle up… because this is where we take action.
Principle #3: Reduce Expenses and Increase Income to Spend No More Than 75% of Your Income.
The Offense and Defense of Personal Finance
Best selling authors Chris Brady and Orrin Woodward have a fantastic audio CD called, “The Offense and Defense of Personal Finance”. On that CD, they lay out a great analogy when it comes to thinking about money. Basically, this is the idea: in sports, offense can only do so much, and defense can only do so much. To be really great, you must have both.
“You have to earn more than you spend… AND you have to spend less than you make.” –Chris Brady
- Offense: Find ways to increase your income. Can you work some overtime each week? Can you mow lawns, paint houses, fix up cars or computers? Have you considered a side business? My business of choice is the LIFE Business, where you can earn an income by leveraging information into people’s lives to help them experience positive change, thus making money and making a difference. The baseline monthly cost is about $50, which can be earned back and profiting within the first month.
- Defense: Find ways to cut your expenses. This is one of the most simple things that a person can do. It does not require any extra work, yet it pays huge dividends. If you can just develop some self control in the area of spending, you’ll find that your paycheck will go a lot further. Can you buy less expensive foods? Can you wash your own car by hand instead of going to the carwash? Can you downgrade the cable, or get rid of it all together? Can you downgrade cell phone plan, or go to a month-to-month carrier like Virgin Mobile? Can you sell your newer car to buy an older model for cash… saving the monthly payments? How often do you eat out? If you cut one $25 expenditure per week, you just gave yourself a $100/month raise.
You get the point: Try to earn more AND spend less. What is amazing about these 10 Principles is that you can get completely debt-free without increasing your income. Remember: Money is not power. Knowledge applied is power… so use it! We are trying to free up some cash to work on our debt.
To stick with our previous example of a household gross income of $50,000, we figured out that our actual deposit to the bank (after taxes, tithe, etc) was $2,983/mo (see Principle #1). Let’s just assume that you did not go out and attempt to earn more. In order to adhere to Principle #3, you would need your TOTAL expenses to be no more than 75% of net income, or $2,237… giving you $746/mo to utilize wisely in other areas.
Now you may ask, “75%?!?! I can’t live on that little!” Here’s the truth, you personally know at least one person who lives on less than 75% of what you make… and that person knows someone who lives on 75% of what they make. It is possible, it just takes sacrifice.
“Quit trying to keep up with the Jones’s because the Jones’s are broke… Stop attempting to look wealthy and start applying the principles to become wealthy.” –Orrin Woodward
Fight the Good Fight!
This is the first step that will force you to make some tough decisions. Remember, you are choosing to do something that millions of people across North America have chosen not to do. You are breaking the chains of bondage from your finances. Pay the price… do what it takes… fight the good fight, it’s worth it!
“Few things allow someone to sleep better than a healthy financial position.” –Orrin Woodward
If you’ve decided to take this journey, post in the comments and let me know your thoughts.
Keep Reading and Leading,
David J. Garza