4 Rule 1

Spend Less Than You Earn

Contentment is a pearl of great price, and whoever procures it at the expense of ten thousand desires makes a wise and happy choice.

—John Balguy, eighteenth-century theologian

The first rule is so simple, I hope it doesn’t prompt you to blurt out, “Come on, Mary, everyone knows that.” I promised you that this is not difficult. This first money rule for life is so logical but so misunderstood, many people miss it. There’s a lot of competition for your mind and your wallet these days and a big world out there that would rather you not pay too much attention to the first rule.

Rule 1: Spend less than you earn.

Of all 7 Rules, this one takes top honors. It is the most important not because the others are less important, but because until you spend less than you earn, you can forget the other six.

Without Rule 1 it will be impossible to master the rest. Curiously, the other six make it possible for you to follow Rule 1. In fact, the 7 Rules are so dependent on one another they have a symbiotic relationship.

Truthfully, I would be surprised if this is the first time you have heard of the concept that you should spend less than you earn. It’s possible to confuse it with a similar concept: don’t spend money you don’t have. I agree that they sound much alike, but there is a big difference between “spend less” and “don’t spend more.”

The 77 percent of US households that are admittedly living paycheck to paycheck could claim that they are not spending more money than they have. However, they’re spending every nickel they do have, then they white-knuckle it until the next paycheck, barely hanging on from one paycheck or other source of income to the next.

What a dangerous and stressful way to live. Granted, theoretically the paycheck-to-paycheck style of money management does not necessarily mean living on credit or spending more than one’s income. But in practice it does. But I digress. Back to Rule 1.

Margin is another word for freedom. Spending less than you earn is the way to create margin. Margin is good because it allows you to breathe, to think and relax. Margin is another name for profit or reserves.

Spending less than you earn is the only way you will experience financial freedom. Contrary to how it might sound to you at first, Rule 1 isn’t about restriction. It’s about freedom—freedom from want, freedom from fear of running out of money, freedom from reliance on credit, freedom from being under the economic thumb of others.

My grandparents knew a thing or two about Rule 1. They would have never dreamed of spending all that Grandpa earned at his job as an insurance salesman, because how else could they make sure they had their nest egg funded at a level where they could sleep at night? They also had Grandma’s rainy day fund, a source of mystery and delight for her grandchildren. She spoke of it with respect and reverence in a way that was warm and endearing.

They had no outside sources on which to rely if they ran a little short or if Grandpa had a slow month. They created their own safety net rather than relying on Visa or MasterCard to bail them out of every little emergency.

Living beyond your means, the ultimate violation of Rule 1, is a horrible way to live because the resulting debt and self-indulgent mind-set leads to depression and anxiety. And that opens the door to all kinds of heartache.

At my organization, Debt-Proof Living, bringing dignity to the art of living below your means is included in our statement of purpose. Living in a way that you spend less than you earn is a safe, dignified, and God-honoring way to live.

No matter how we say it—spend less than you earn, earn more than you spend, live below your means—my goal is that by the time you finish this chapter you will experience a great awakening for why consistently spending less than you earn is the key to experiencing freedom from debt.

It’s About Attitude

Rule 1 is less about money and more about the most fundamental asset that you have in life: your attitude. Attitude is the way you respond to everything in life. Your beliefs and feelings shape your attitude. Your attitude is the only thing in your life over which you have complete control. Read that last sentence again.

Sure, you have influence over a number of people in your life, but absolute control? No. Your ability to make decisions gives you some control in other areas, but nothing other than your attitude—your thoughts and actions—is completely in your control.

Before you can make the decision to take control of your money, you must be convinced and committed. Spending less than you earn isn’t something that happens to you. It is something you make happen. It is a decision. It’s the attitude you choose for how you will conduct your life and manage your money.

Tattoo this on your brain: attitude is everything. Write it on the inside of your eyelids so it’s the first thing you see every morning and the last thing at night.

For some, it is a challenging change, a new way of life that requires learning, devotion, and tenacity. Making a serious commitment to spending less than you earn will be the first giant step you take toward finding financial freedom.

A Look at Income and Expenses

Years ago when I fell on my face before God in abject humility and remorse for how I’d spent my family into oblivion, I saw for the first time that my spending was the problem. It was out of control. The resulting debt was threatening my marriage, home, and family. Spending more money than we earned—even if it was just a little bit more—had a horrific cumulative effect.

I knew that I spent too much money and used too much credit. But I didn’t really get the full impact of how a single shopping spree had a wide-reaching effect on my life until I came face-to-face with simple visual illustrations like those that follow. Seeing this illustrated almost knocked me out. How could I have been so foolish, so ignorant and lacking discernment?

I want to show you visually what affected me so profoundly and helped me to understand the long-term effect of overspending.

Figure 4.1: Income Over Time


Let’s say this chart represents your income from when you got your first job to now. Or allow it to represent your household income from the time you married and established your home. This is not scientific but rather intended to represent the money flow into your life.

When you got your first job, you started out at a low rate of pay, then gradually it increased either because you changed jobs or got promotions and pay increases with the same employer. The details are not important, only that you see that over the course of years, typically, one’s income increases.

Now let’s add spending to the picture.

Figure 4.2:
Income and Spending Over Time


This is an illustration of a household that spends what it earns. Technically, this is a picture of “living within your means.” Spending matches income, precarious as that might be. The lines should really be one on top of the other to indicate that for this family or individual, it’s money in and money out, in equal amounts. But that would be difficult for you to see on this two-dimensional page, so I’ve moved the lines apart ever so slightly.

This is also what it looks like to live from paycheck to paycheck, on a really good month. Whatever is in the paycheck is the amount of money available to spend until the next paycheck. Of course it’s not as easy as this illustration might suggest, because show me whose real-life expenses track identically to one’s pay. But in theory this illustration is perfect for showing the paycheck-to-paycheck lifestyle. Income determines spending.

In this scenario, when the breadwinner gets a raise, as indicated by the upward climb of the income line, expenses increase at the same rate because there’s more money to spend. There’s no margin for the unexpected, no savings, just a passive decision to hang on until next payday, week after week, month after month.

Figure 4.3:
Spending Sometimes Greater Than Income


This graphic depicts the household that can’t quite manage to live paycheck to paycheck. When the month turns out to last longer than the money, these folks resort to credit to bridge the gap. Debt comes and goes, which you can see as these folks pay off the debt, and for a season they are committed to spending less than their income. That’s fairly impressive until we see how long that lasted.

Things get out of control once again as perhaps a child goes off to college or gets married, or they bought a new home and their expenses increased significantly more than their income could cover. It could be due to a season of unemployment for which they were not prepared or, most likely, the ugly accumulation of revolving debt.

Consistent overspending fueled by credit can quickly create a situation like the one you see in figure 4.3. Here, these people are destined to head into their retirement years spinning their wheels because their debt controls them. Without a major change of heart, mind, and behavior they have little hope of bringing that spending line down prior to the income line dropping severely as their paycheck becomes a Social Security check.

Before you get too depressed, let’s look at an income and spending scenario guided by Rule 1: spend less than you earn.

Figure 4.4:
Spending Less Than Income


Here we see the same income line as in the previous example. But, look at the spending. In the beginning it tracks income pretty closely but as income increases, spending does not increase to match. The space or “gap” between the two lines indicates money this family or individual does not spend because they keep their spending less than income. That space represents the money that allows them to save, give, and invest.

Figure 4.5:
Adding Investment


In this graphic we see the same income and spending with an added line accounting for the money they are saving and investing to grow for the future. This could be through an employer-sponsored 401(k) plan and/or individual investing. At any rate of return, the investment income remains very low, often appearing to be nonexistent for quite a while.

Over time, as the growth or “return on investment” begins to “compound” (a term that means the growth becomes principal and then that amount begins to earn interest or experience growth as well), notice how the “investment income” line begins to ascend.

Lowering spending to increase investment income is the way to grow wealth. It is the way that people with ordinary incomes are able to do extraordinary things. The combination of time and living consistently below your means is a formula that works for anyone regardless of income level.

Take another look at the investment income line, specifically where it takes a noticeable turn upward until it meets the spending line. Although it may take time, eventually investment income will equal spending. This is a critical point, because this is the point at which you begin to experience financial freedom. Your investments are creating enough income to cover your expenses, making you less and less dependent on your job as your source of income, even though you may choose to continue to work so that your investments can grow undisturbed.

This couldn’t happen if that spending line was exactly the same as the income line throughout all of the income-producing years. Or, if spending was routinely greater than income.

Figure 4.6:
Investment Income Greater Than Spending


This is a longer view of the previous graphic, showing that even after reaching financial freedom, spending remains low so that investment income can continue to grow. In this scenario, because you continue to work, you are not making withdrawals from your investments to cover living expenses.

The way to get from where you are now to where you are spending less than you earn is to assess every way you spend your income. By doing so, you will find that place of contentment where you are not constantly striving to have more, because you have chosen to be satisfied with less.

You become financially free when your passive income (the income that your investments earn as opposed to the income you receive from working) exceeds your expenses.

Needs vs. Wants

Our basic needs as humans are few: shelter, food, and clothing. Everything else, with the possible exception of taxes and medical attention, is a “want.” But in reality, distinguishing a need from a want is not quite that easy. Living in a country where there is so much abundance and so many choices, a sense of entitlement can muddy the waters when it comes to what we want and what we need.

Because our resources are finite, we have to make decisions about which wants to fulfill. The strong pull of the culture can skew our thinking, making us believe that we don’t have a choice. That so many things are must-haves. We’re persuaded to think we have to spend money in certain ways and amounts. In reality, our spending on wants is a choice. The only ones who “need” us to spend on wants are the marketers!

So, if you’re managing a big monthly payment on a fancy car, that car has morphed from a want into a need, but only because you chose to buy it on credit and selected that particular payment schedule.

It’s easy to confuse needs with wants. You work hard, so you deserve to drive a nice car, right? Whether it’s a time-share on Maui (everyone needs a vacation) or a phone upgrade (you definitely need a smart phone), magazine-cover-worthy Christmas celebrations, or just a few meals out each week—your sense of entitlement can cloud your thinking when it comes to what you want and what you really need.

Thankfully, we live in a society where items beyond the bare-bones fundamentals of food and shelter can be considered “needs.” Your personal liberty will help you to make those kinds of determinations. What may be a “need” in my life could show up under “want” for you.

Ugly Attitudes of Entitlement

Most people, I believe, have an elevated sense of entitlement simply because they have no idea how fortunate they are. Face it: if you’ve never been hungry, never wondered where you would sleep, and never had to go without shoes, your thinking may be skewed about minimum creature comforts.

If every winter your family took a ski vacation; if every Christmas you were delighted to find your entire wish list wrapped and piled under the tree; if every summer you went to camp; if you started every school year with new clothes, shoes, and the best school supplies; if you had your own cell phone and car before you were old enough to vote (and Daddy’s gas card just in case), why would you think you were entitled to any less as an adult?

Compare the houses our parents and grandparents were raised in to those we’re living in now.

In 1950, the average new single-family home in the US was 983 square feet.[16] It was normal for a family to have one bathroom and for two or three growing children to share a bedroom. By 1970, the average home grew to 1,695 square feet with two bathrooms. By 2008, that average home had expanded to 2,629 square feet with multiple bathrooms, and the addition of a family room was considered standard fare.[17]

There was a time when only the rich and famous could afford granite counters and marble floors. Now for many those are essential, plus a bedroom for every child, a living room, family room, Wii-sized media room,[18] walk-in pantry, his and hers showers, a home office, and kids’ playroom.

While it’s easy to criticize the younger generation for its rampant sense of entitlement, it’s not just a problem of youth and immaturity. Even our vocabulary now includes words to describe this sense of entitlement that crosses all demographics, words like “consumerism” and “shopaholic,” “affluenza,” “entitlitus,” “conspicuous consumption,” “retail therapy,” and “consumercide.” We don’t need definitions. We know what these terms mean, which is some version of, “I work hard for my money; I deserve to have ___________ (insert your luxury item of choice).”

Great. But then you have to keep working even harder to pay for the things you deserve to have because you work so hard. What’s the point of spending money we don’t have on a want, and then working so hard to pay for it that we never enjoy the item we thought would bring pleasure?

The Stuff of Entitlement

The rapidly growing self-storage industry in the US and Canada bears testimony to the fact that we have become so addicted to stuff and a materialistic way of life, with serious difficulty distinguishing between needs and wants. More than 10.8 million US households are paying a public storage facility, every month, to store the stuff they deserve and just could not live without.

At last count, there were just shy of 51,000 storage facilities—more than seven times the number of Starbucks in the US.[19] Within those storage facilities there are approximately 17.5 million individual storage units, covering 2.3 billion square feet. One out of every ten US households now rents a unit in which to cram a whole lot of stuff they never use.

This Seductive Culture

Advertising has become such a big part of our culture, we are mostly unaware of the ways it influences our desires, the ways we spend our money, and to what extent we’re willing to legally obligate money we haven’t earned yet. Simply put, advertising is the art of convincing people to spend money they do or do not have for something they do not need.

Advertisers rely on marketing theory that says people are driven by four things: fear, guilt, greed, and the need for approval. Ads are designed to throw us off balance emotionally to create discontent.

First, the commercial advertisement grabs our attention then proceeds to stir up one or more of the emotions I just mentioned, followed by a product and a promise to alleviate the discomfort it created in the first place.

Several years ago, I read in the New York Times that the average American adult is the target of some 5,000 commercial ads in a single day.[20] How outrageous is that? Sure, we live in a highly commercialized society, but 5,000 ads? In a single day? I figured that had to be an exaggeration.

One day I decided to conduct my own test. I would count the ads I heard or saw in my typical day. I knew it couldn’t come anywhere close to thousands, but I needed to find out for sure.

The next morning the radio alarm sounded, and before I could open my eyes, I put two hash marks on my score pad. So prolific were the ads on television, I could barely keep an accurate count and get ready at the same time.

Of course, I had to count every message, banner, business placard, real estate sign, billboard, license plate frame, bumper sticker, commercial vehicle, and bus I saw on the way to work, all the while being careful not to miss any radio ads. Good thing I wasn’t driving.

Reading the newspaper boosted my count significantly as did flipping through a few magazines. Have you ever counted the ads in a typical woman’s magazine? Try it sometime.

Logging onto the internet shot my count through the roof. The mail arrived at 10:00 a.m., and that’s when I surrendered. Not only was it impossible to get anything done while counting the commercial influences on my fairly low-key, ho-hum kind of a day, I couldn’t keep up with the pace. It was a mind-boggling exercise.

So, 5,000 ads per adult per day? Easy! And after only a few hours of intense focus I became keenly aware of the way that advertising creates desire and dissatisfaction in me to the point that I began to “need” things and services I didn’t know existed only hours before.

My experiment gave me a fresh awareness of the strong pull of the culture and the way advertising manipulates our feelings. Honestly, it was a little scary to realize just how vulnerable we are to the stealthy persuaders around us. It’s like advertisers are forever sneaking up on us, just waiting for that moment when they can catch us unaware and entice us to hand over our money in ways we hadn’t even dreamed.

What can we do? We can try to remember to switch the channel or toss the latest cool mail order catalog into the recycling bin without looking, but honestly, how long will we keep that up?

What we need is not change but rather transformation. We need to stop hoping that someday, somehow if we work hard enough we’ll make enough money to have all the things that will finally make us happy. We need to stop believing that it’s okay to have things we want now, even if we cannot afford to pay for them.

Taking responsibility for the choices you make, identifying most of them as wants, not true needs, can be frightening. But when you see that you do have choices, you’ll stop feeling like a victim of your circumstances and realize that you really do have the power to control the choices you make with your money.

Here’s the Secret

What follows may be the single most important thing you will read in this book, so I hope you are paying attention: choosing contentment as a way of life is the only way to win the battle between needs vs. wants. Contentment is choosing to be happy with what you have, while not always desiring something more. Contentment is not something we achieve, it is a choice we make. It is an attitude we learn. It’s a decision we make to buy what we need and want what we have.

Prosperity does not bring contentment, and poverty cannot take it away. Read that again. If prosperity were the secret for contentment, Hollywood, the NBA, and the National Lottery Winners Association (I made the last one up) would be the happiest places on earth.

Contentment is that settled place where we are at peace knowing that while we may not have it all, we do have enough. Enough for survival, enough for comfort, and enough to meet our needs.

Confronting yourself is a great way to build your strength against the strong current of commercialization. True needs are never discovered while standing in the aisle at Target. If you needed bright orange cookware, an iPad, or whatever thing you’re about to pop into your shopping cart, you knew that before you arrived. It would have been on your list, physically or at least mentally.

The best way I know to separate needs from wants is through self-assessment. Here’s what I mean.

Before making a spending decision, ask yourself these kinds of questions and expect honest answers.

This flowchart is a much-refined version of something I wrote down and attached to the front of my wallet many years ago. I realized I needed something to interrupt my impulsive nature.

In a moment of strength, I made myself a promise that I would run through these yes and no questions before I bought anything of value, which I determined back then to be $20 or more.


Here’s what you are going to discover using my pocket flowchart: it’s like a pause button that lets you take a breath and focus on what you’re about to do. It offers you time to think and regroup. And if you get to the very end and still believe this is a purchase you must make, don’t be surprised if after your self-imposed 24-hour waiting period, you change your mind.

I cannot tell you how many times I’ve gotten all the way to the cooling-off period, gone home, and then never purchased the item. It’s like once I get out of the vicinity of whatever it was that I believed I truly needed, the desire dissipated, which is quite amusing considering how many times I’ve convinced myself that it really was something I needed.

Widen the Gap

Creating more space between what you earn and what you spend is the way to build wealth, reduce stress, create options, and find peace of mind. Living below your means is an honorable way to conduct your life. It is the money you don’t spend that gives you the freedom to live the life you love and the life God has for you.

It would be remarkable if you could change just one thing that would result in an overnight widening of the gap between the income and spending lines on your personal Time and Money chart. Realistically, that’s not going to happen. But don’t despair. Changes you make today will begin to make a difference, even if it’s only a small amount at a time.

12 Easy Ways

Since 1992, when I founded Debt-Proof Living, I’ve been on a mission to help people discover ways to widen the gap between their income and expenses. In response, readers have sent in their favorite tips to share with me and my DPL family. While I can’t share all ten thousand (more by the time you read this), here for your enjoyment are a dozen good ones.

1. Borrow and share. Stop buying things you are so sure you need like yard tools or DVDs. If you won’t need to use it more than occasionally, borrowing or renting makes sense.

2. Avoid the mall. There are some who see a shopping mall as an entertainment destination. Wandering around to see what’s new is called browsing, a financially deadly pastime. If you truly need something, shop sales at discount stores for that specific item and then leave.

3. Limit exposure to advertisements. Commercials and print ads, as previously mentioned, are designed to make you feel incomplete, out of style, and unfulfilled. When you cannot avoid, analyze. Verbalize the inadequacy the ad is attempting to convey, then rebut it.

4. Live with cash. For your day-to-day spending, lock up the plastic. Use cash only. Prepare to be amazed as you wake up from your comatose spending. Statistics bear out this fact: you spend more when you pay with plastic. Even if it’s a plastic debit card. Retailers much prefer that you shop with plastic because you will routinely spend 30 percent more, simply because you don’t have to be as careful as you are when you have only a limited amount of cash. Use this fact and embrace the inconvenience of cash to reduce your spending. It is so worth the effort.

5. Spend-free day. Designate one day per week that you will not spend anything at all except for life’s absolute essentials. Nothing. Gear up, plan ahead, and then stick to it. When it becomes comfortable, make it two days a week. Expect your brain to wake up in ways you had not anticipated. I know some who have taken this all the way to a spend-free month, once each year.

6. Save the difference. When you switch to a cheaper phone service, find the perfect shoes on sale, use coupons at the supermarket—actually save your “savings” in a bank account. Unless you deposit the difference between what you spent and what you would have spent had that item not been on sale, you haven’t really “saved” anything.

7. Stay healthy. Medical problems can drain bank accounts in a big hurry, even when you have insurance. Anything you can do to improve your health will go a long way to widening the gap.

8. Cook in. As food prices climb, eating out is getting so expensive! By the time you add tax and tip, eating out can be one huge budget buster. Save it for the occasional special occasion and start eating at home. All seven days of the week. If you don’t know how to cook, learn. Coffee lover? Make it at home. A $3.95 coffee five days a week is $1,027 in a year.

9. Pare down. If your home is typical, you are overrun with stuff, much of which you don’t need, don’t use, and don’t even want. Determine that not only will you stop adding to your stuff, you’ll make a commitment to liquidate. Turn that stuff into cash. There are myriad websites where you can get cash for used books, DVDs, video games. Become an eBay seller, a Craigslist expert, and a Freecycler.

10. Don’t pay retail. You may have to wait for something to go on sale. That’s good, because more likely than not, you’ll change your mind or even forget about it in the interim.

11. Unfriend the Joneses. Admit it. You’ve been trying to keep up with them, haven’t you? Now it’s time to let them go because this is not a competition. It’s your life, your future. It’ll be a lot easier if you can convince yourself that they’re buried in debt trying to impress you.

12. Increase income. Cutting expenses will eventually have its limitation. There comes a time when you need to do anything you can to bring in extra money, even if you already work a full-time job. Consider overtime at work, dog walking, babysitting, tutoring, or using any skill that’s unique to you for which others will pay you to do that work for them: web designing, party planning, teaching music lessons are only a few ideas.

Never underestimate even the smallest effort to spend less or earn more. It all adds up, and faster than you might think.

Quick-Start Recovery

If the income and spending lines on your personal Time and Money graph have switched places—your spending often exceeds your income—we will not assume that you’ve been robbing banks to pull off such a feat. It doesn’t mean that you’ve done anything illegal. Sadly, overspending becomes an acceptable way of life for some people.

We live in a world of easy credit that’s readily available and takes many forms: home equity lines of credit, 401(k) account raids, credit card accounts, overdraft protection, payday loans, and for some, the ever-reliable Bank of Mom and Dad.

You may be part of the 77 percent paycheck-to-paycheck crowd (page 19). You’re not necessarily spending over your income every month but you squeak by, scrounging to find loose change under the sofa cushions to buy milk and diapers as you wait breathlessly for your next paycheck. And you’re sick of it.

How can you possibly begin to spend less than you earn when you have not found success trying to live on 100 percent of your paycheck? You’re so far underwater, you’re reaching for scuba gear.

Look, I am not going to sugarcoat the truth: you are in a dangerous position. You do not have the luxury to ease your way out. You need to make radical, dramatic, life-saving changes.

1. Stop spending. Just stop. If it is not required to preserve life (examples: basic food, gasoline to get to work, medication, rent) do not buy a thing. Round up all of your plastic and put it away in a safe place that is not easily accessible.

2. Finish reading this book. We’re only on Rule 1, there is more to come. As I told you, Rule 1 lays the foundation for those that follow. I will not leave you hanging.

3. Downsize your lifestyle. I would not be surprised to learn that you have cut your expenses to the bone, and that you can cut no further. I respect your efforts, but if you are unable to live on less than you earn, you have a lot more cutting to go. It’s called austerity, and that surpasses frugality. Austerity may require that you move to a cheaper neighborhood or move in with family. Sell your extra cars in favor of public transportation. I don’t know exactly what you need to do, but somewhere between the bare necessities of life and where you are now is a place where you are spending less than you earn.

4. Pray. As we move through the rules, you are going to learn that I am a person of faith. I believe that we are here by God’s design as stewards of all of the good things he has for our enjoyment. Talk to God about your situation. While I don’t know what you are going through, he does. He loves you and cares about your life. God will wait patiently until you come to the end of yourself and surrender your life and your will to his loving care.