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When considering your personal finances, you may feel that the most misunderstood part could be:
- Budgeting or as we call it a spending plan
- Where or what to invest in
- When you can retire
Sure while these items are hotly debated and misunderstood, an area we see as being quite simple yet not easy is:
Spending less than what you earn
This may seem very basic however consider this below example, we'll call them Jim
Jim earns 150k after-tax from his role as an engineer. You consider that he must be a corporate high-flyer being able to take trips all around the world and on top of his financial game. What you don't know about Jim is that he spends 140k and is required to pay 15k to service his student loans each year. While we may not all be maths geniuses, you do not need to be to work out that Jim is paying out 5k more than he is earning each year.
Why spending less than you earn is the most misunderstood area of personal finance
- It is the area which people often neglect due to not tracking at any level how much they are spending
- We feel that there will always be a raise or a higher credit card limit on the horizon
- It is not the most exciting part of finance and investing is considered more exciting and the sexy part of personal finance
The consequences of spending more than you earn
- Not being able to invest or create a financial buffer. This means that if there is an emergency i.e. you lose your job or have a medical complication then you may not have enough
- Relying on a paycheck and not living life on your terms
- Relying on others to bail you out and not being able to give back to your family and community
As you can see the consequences of not understanding the importance of spending less than you earn will impact all areas of your financial and non financial life.
What is something you don't quite understand about personal finance?
Did this help you? If so, please share!
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