Personal Finance in Less Than Ten Words

Spend less than you earn and invest the difference

Here’s a serious question: why should you even bother to learn about personal finance? After all, plenty of people remain quite ignorant about the topic and seem to (mostly) get by.

• Freedom — Once you have enough money to be financially independent, you are no longer shackled to the need to earn an income and all the strings attached to it
• A Margin of Safety — If things go wrong, you have a cushion. Losing your job sucks, but it sucks less if you have a fat emergency fund and a massive portfolio

While there’s a lot of “personal” in personal finance, these two goals are pretty universal. They can be achieved by following a simple formula — and we can sum up the short version in less than 10 words:

Spend less than you earn and invest the difference

Of course, the condensed version glosses over a fair bit, so let's go one level deeper by unpacking each of the three components:

• Spending Less (Frugality)
• Earning More (Income Generation)
• Investing the Difference (Investing)

Spend Less (Frugality)

Frugality reminds you that there is more to life than consumerism. It also protects you from risk since a cheaper lifestyle is easier to fund.

The most important reason to master this pillar of personal finance is to keep the goalposts from shifting. If your spending keeps pace with your earning, not only will you never get ahead financially, you’ll never get ahead psychologically. You’ll feel just as stuck making and spending $60,000 as you did making and spending $50,000.

When it comes to frugality, there are two areas you should focus on quick wins and big wins. If it’s not easy, it better saves a lot of money. If it doesn’t save a lot of money, it better be easy. Otherwise, you should just focus on making more.

Quick Wins

The best way to get quick wins is to look at all the bills that you currently pay (internet, phone, car insurance, cable, subscriptions, etc.) and then brainstorm how to make them cheaper.

This could mean cancelling, downgrading your service, negotiating your rate, or switching to a cheaper provider.

I wrote about this strategy in more detail in this article:

Big Wins

Big wins involve keeping your biggest expenses under control. For most people, these are the biggest expenses:

• Housing
• Transportation
• Food

Of these three, the first two involve a few decisions — mostly made up front — and then run on autopilot. Food is the most expensive line item that sees you making recurring decisions each year.

I think the easiest way to think about keeping food under control is to try to lower the cost of your average meal by $1. That might sound odd, but I go through the logic behind it in this post here:

I realize that housing and transportation are two areas where it’s hard to tell people to cut back on. When it comes time to find a house or apartment or buy a car, more expensive always seems more enjoyable.

I would counter with two points:

• You’ll get used to wherever you live (and whatever car you drive)— no matter what you choose, you’ll quickly feel the urge to upgrade. This is true whether you are paying $500 in rent or $5,000 in rent. The good news is that you can be happy in both situations.
• The “man in the car paradox” suggests it’s an expensive mistake to try to impress people — and let’s face it, part of the temptation to buy a big house and fancy car is the desire to impress other people.

Living below your means when it comes to housing and transportation is the easiest way to stay within a reasonable budget each month.

Earn More (Income Generation)

Figuring out how to grow your income is an important life skill. Earning more gives you confidence in your own ability to provide value. It also sets you up for future success since you pick up useful knowledge and skills along the way.

After you nail the frugal quick wins and big wins, it only makes sense to focus on frugality as much as necessary to keep the goal posts from shifting too quickly and to switch gears to focus on income generation.

This is because frugality is subject to diminishing returns and has a natural cap, while income can experience exponential gains and has almost unlimited potential. You can only cut spending by 100%, but you can grow your income by 100%, 200%, or even 10,000% (or more). It might not be easy to grow your income, but I promise you; growing your income by 100% is easier than cutting your spending by 100%.

So how do you do it?

The traditional way

Climb the corporate ladder. Show up to work every day and try to make it a better place. Apply for promotions inside and outside your company. You’ve heard this advice before.

I think the most under-used strategy is simply to schedule a meeting with your boss and ask her what you’d need to do to deserve a raise. Bonus points if you come with a plan of how you can improve your department. Make sure you send a summary email afterwards, so there is a record of your conversation, and schedule a follow-up meeting to discuss progress.

The non-traditional way

You find a lot of people talking about “side hustles” nowadays — and with good reason.

The internet has exploded the number of viable options for earning an income by expanding your reach and decreasing the cost of doing business. In the connection economy, anyone with wifi can explore many opportunities to create scalable income from their keyboard.

This can be an attempt to create an alternative career or just a way to earn money on the side. I currently work a regular 9–5 job, but earn money every month writing for Medium as well as from a few other sources such as a podcast, YouTube channel, and a book that I self-published.

Invest the Difference (Investing)

Investing is one of those things that a lot of people know they should be doing, but many aren’t because they’re scared of screwing up and aren’t sure where to start.

The good news is that there’s a simple, easily automated, passive approach that is incredibly powerful and should be sufficient for most people.

Here’s the strategy as simply as I can state it with the logic behind it explained below:

During your wealth accumulation phase, invest in low-cost, stock market index funds, starting with tax-advantaged accounts and switching to taxable accounts when you hit the yearly limit.

Let’s unpack that:

The wealth accumulation phase

JL Collins, author of The Simple Path to Wealth, says that your investing career can be divided up into the wealth accumulation phase (investing) and the wealth preservation phase (spending your accumulated wealth while making sure your nest egg doesn’t run out).

The wealth preservation stage is a little more complicated because you have to deal with concepts like asset allocation to mitigate the dangers of sequence of returns risk. But the wealth preservation stage is like the advanced class in investing. To get started, you just need the beginner’s guide.

Low cost

Economists say there’s no such thing as a free lunch, and it’s certainly true in investing. You should be investing with a company (and in a fund) that won’t be charging you any extra fees. Ideally, the only fee you will pay if you invest in mutual funds is the expense ratio. The goal here is to keep it below .05%. That’s very doable when you put your money into index funds (see below)

Stock market

There are lots of places you could invest your money:

• Real estate
• Starting a business
• Your own education
• Physical assets like gold

All of these can be great options, but most aren’t passive. Among the passive options, the stock market has historically produced the best returns.

That doesn’t mean it’s the best investment; it just means that it’s a solid investment that most people can fit into their lives.

Index funds

An index fund is a form of mutual fund. You and other investors put money into the fund, and you all own a piece of the fund. The fund itself owns many stocks; its composition tracks a stock market index like the S&P 500 (the 500 largest companies in the US) or a total stock market index like the Wiltshire 3000.

Here are some actual total stock market index funds from low-cost providers:

• VTSAX — Vanguard total stock market index fund
• SWTSX — Schwab Total Stock Market Index Fund
• FZROX — Fidelity ZERO Total Market Index Fund

Tax-advantaged accounts

Retirement accounts like a 401(k) (provided by your employer) or a Roth IRA (which you would open on your own with a brokerage like Vanguard or Fidelity) let your money grow tax-free and can protect it from taxation when you either put it in (traditional) or take it out (Roth).

Once you hit the annual limits on these accounts, you can open a regular taxable brokerage account where you can invest without limit.

When it comes to investing, it’s not possible to come up with a perfect plan. Getting started is more important than ironing out the details. The simple plan I’ve outlined isn’t perfect, but it’s good enough to start with — as long as you don’t panic and sell when the market takes a dip.

I go into more detail on investing with my book, which you can find here:

Nine Words Isn’t Just Nine Words

In this post, I promised to summarize personal finance in less than 10 words… and I delivered: Spend less than you earn and invest the difference.

It’s succinct enough to memorize and can guide you as you make real-world decisions. As we learned in the post, however, those nine words need a ton of explanation. Not only was the post itself more than ten words, I frequently had to link to other posts (or even books!) to keep it from getting too long.

Consider this my attempt to give you the few actions that make the most difference when it comes to sustainable wealth creation. There’s more to be said, but you have what you need to get started.

Let’s make a deal: I’ll keep writing if you keep taking action 😉

This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.