How The Number One Personal Finance Principle Affects Two Diverse Families

by Joe Plemon on January 31, 2011

Julie* is a single woman, fortyish, who lives a full life. She is actively involved in the County Writer’s Guild, volunteers for a variety of service projects, and is commonly spotted at our community’s many Saturday morning yard sales. Julie has a quick smile and engaging personality; our paths seldom cross without her taking time to ask me about my family. With no debt and a $12,000 emergency fund, Julie has few money worries.  Oh…did I mention that she has a minimum wage job?

How”, you ask, “does she do it?”

Great question. She practices the most important principle in personal finance: she lives on less than she makes.

Julie lives in a small, inexpensive apartment. She opts for a bicycle with a carrying basket over owning a car. Understand that this is rural Southern Illinois where public transit is nearly non existent. I asked Julie once if she would like to have a car. She hesitated, smiled briefly, then replied, “Well, I suppose that would be nice…if I could afford one. But I am not going to sacrifice my emergency fund to buy something I can get by without.

I admire Julie, don’t you?

Pearl* and Matthew* are a couple in their late forties who, with a combined take home pay of $14,000 a month, have less net worth than Julie: negative $30,000. Those numbers are not typos. It is $14,000 as in fourteen thousand dollars. If they sold everything they owned, they would fall $30,000 (thirty thousand dollars) short of paying off their debt.

How”, you ask, “could they get in such a mess?

Again, great question. They do not practice the most important principle in personal finance: they do not live on less than they make.

I write this to underscore the significance of this one principle. Whether you earn a lot or a little, following this principle will guide you well throughout your life;  ignoring it can shipwreck your finances.

“But…but…I have too many bills! There is no way I can live on less than I earn.”

I realize it isn’t going to be easy, but never say never. You may need to cut out some of those bills and take on a second job to pay off existing debt. You may need to sell a car…or two. Let Julie be your inspiration…if she can spend less than she earns, you can too.

Here are 3 reasons to live on this principle:

1. You will always manage your money when you get more.

When you know how to manage a little, you will be able to manage more. I have no doubt that Julie will continue to spend less than she earns even if her income were to double or quadruple. I don’t have that confidence for Pearl and Matthew, who have never proven that they can keep the principle at any income level.

2. You are ready for emergencies.

Julie is much more ready for emergencies than Pearl and Matthew are; a job loss would put a temporary dent in her emergency fund, but because she has practiced living on less than she makes, she would figure out a way to get by. Besides, another minimum wage job, although not ideal, would not be hard to find.

3. You will experience peace of mind.

The knowledge that you can make it through tough times will give great peace to your life; after all…you have done it before and you have confidence you can do it again. Julie’s frugal lifestyle gives her tremendous peace of mind. Pearl and Matthew, on the other hand, live very stressful lives because they have no confidence that they can manage what they have. Their consumption lifestyles have become an emotional curse.

The most important principle in your personal finance is to spend less than you earn. The stories of these two families illustrate that very little income is not an excuse to break this principle and that much income is not a guarantee that one will keep it.

Readers: do you keep this principle in your own lives?  If so, have you always done so?  If not, what would it take for for you to start doing so?

*not real names


{ 15 comments… read them below or add one }

Tim @ Faith and Finance January 31, 2011 at 8:11 am

What a story! The first thought that comes to mind is the dreaded quote:

“The more you make, the more you spend”

I hope to ‘punch this quote in the face’ (a little PDITF Ninja reference 🙂 ) as our income starts to increase in the future.

I think it takes acknowledging the small things before you can really apply it in the big things – simple, yes, but also crucial.


joeplemon January 31, 2011 at 8:44 am

The reason that quote is such a dreaded one is because it is so, so true. UNLESS one is very intentional about keeping the same lifestyle and using that additional cash flow for a specific purpose. I love your “punch this quote in the face” attitude. (You should write about it!)

I am very proud of my son and daughter in law — they have lived on his income while she was in college and now that she has graduated and working, they are planning to live on that same income and use the new income for debt reduction and emergency fund.


krantcents January 31, 2011 at 2:55 pm

I have always lived on less than I earn. One of the reasons is I think long term versus short term. It bothers me to pay high interest rates or fees for nothing. I have a good life, enjoying what is important rather than just spending money.


slug January 31, 2011 at 3:22 pm

By far the most important personal finance maxim to live by regardless of SES.


retireby40 January 31, 2011 at 4:02 pm

Joe, Great stories.
We always lived on less than we made and we never really had any money fight because of this. My family was poor when I was growing up and I learned from my parents to save. The Mrs. is also a huge saver. Not sure where she got this from though. Her mom is they “you only live once type.” 🙂


Derrik Hubbard, CFP January 31, 2011 at 7:33 pm

Great reminder, Joe.

Simple in concept, hard in practice, huh?

Wouldn’t you say that the attitude of contentment is a huge factor in the spending beyond your means? It’s almost as if we’re trying to fill something spiritual in the spending that can never be filled by material things.


joeplemon January 31, 2011 at 8:14 pm

@krantcents and retireby40,
I love reading of those who have always practiced this principle. It seems to be deeply ingrained in both of you, so let me ask, “Is it ever a struggle for you to live on less than you earn, or has doing so become totally second nature?”

I think you are on to something. When people are searching for contentment, they will try all kinds of things (drugs, affairs, career changes, etc) to fill that void. I would certainly include overspending as a way to seek contentment. Obviously, none of those work. What, in your mind, does work?


DIY Investor February 1, 2011 at 8:34 am

At a recent presentation an advisor was doing back flips explaining how soon-to-be retirees should estimate, down to the penny, how much income they will need in retirement. One gentleman raised his hand and said, “I’ll figure my Social Security, my pension, and 4% of my nest egg. I’ll live on that. All of my life I’ve lived within my income and that’s what I’ll do in retirement”. Needless to say, the advisor had never looked at it from this perspective, as you could tell from the look on his face.


joeplemon February 1, 2011 at 9:23 am

Right. The principle stays constant no matter what extenuating circumstances present themselves.

I love this vignette. My guess is that the adviser, besides not knowing this principle, did not practice it.


Carol@inthetrenches February 1, 2011 at 4:44 pm

One thing that really helped me become more aware of this was doing a balance sheet every year with my new budget. Kind of like getting on the scale for those who are on a diet. Saving almost seems to come natural for some people but for some of us it takes constant reminders and self-discipline. Oh, look…did that sign say “Sale”?


Evan February 1, 2011 at 9:10 pm

Fantastic stories…I often find people in my office that are in that 200 to 300K/yr world that have only accumulated a fraction of that…its so frustrating to watch


Squirrelers February 1, 2011 at 9:32 pm

Absolutely I strive to regularly live on less than I make. I’m a big believer in focusing on the income minus expense gap.

The story you presented was an interesting example, in that you described people with very little in terms of income or savings. But, the one with no debt and an emergency fund seemed to have peace of mind. That’s a big thing about living within your means and avoiding debt – you can rest easier knowing that your future hard work isn’t already spoken for.


Ben February 2, 2011 at 6:35 am

I live on 50% of my income, the 50% I invest and get average 10 to 15% return a year
I don’t have debt what so ever, my parents think I am poor because I live in a modest house compared to other people -:)
But if I want I can buy similar house clean without debt from my stock holding but I refuse to do so and let everyone know I don’t have much money and keep compounding my investment, at this rate I can retire around 50 with high income coming from stock dividend.

I rather have this life style thanks -:)


joeplemon February 2, 2011 at 9:05 am

I am assuming your balance sheet is similar to a profit/loss statement for personal finance. It shows you the stark truth. Right?

I met a couple yesterday who, in spite of a great income, are drowning in debt. Their philosophy is “Work hard. Play hard.” I told them I agree…once the debt is gone and they learn to live on less than they earn.

Some people think they can out earn their stupidity. They are wrong.

Good point about the peace of mind aspect. The thought, “I might work hard for the rest of my life and have nothing to show for that hard work.” stresses me out just putting it here in this comment. Definitely not a good recipe for peace of mind.

You are cooking, my friend. Where did you learn to live this lifestyle? Parents? Books? Just come up with it on your own?
Thanks for sharing. Hopefully others will be challenged by your comment!


Ben February 3, 2011 at 3:14 am

@ joeplemon
Books mainly influence me and I always has a determination
to be financially independent from an early age.
could be my poor up bringing that make me to strike for more money
and a better life..

I read a lot of books but for some reason
I never like novel only financial books
and self help and fiction books.

These are the books that have influence on my way of thinking about money and living a frugal yet very fullingly life.
I’m frugal but I am not cheap..I have my iPhone and iPad and
quality cars and only buy quality goods, If I cant afford the good
I go without but if I can I buy Quality…

Living Frugal and build Wealth books

The Millionaire Next Door by Thomas J. Standley
Turn Your Debt Into Wealth by John M. Cummuta

These books are my guiding principles
to get better than market return for my stocks

The Intelligent Investor by Benjamin Graham
Common Stock Uncommon Profit by Phil Fisher

To be good at anything you have to practise and
spend a lot of time on it…these books guide me
to deliberate practise on my investment principles.
I can safely say I am a far better investors than
most fund managers..I have 100% control of all my investments
no one but me handle my money…

Talent Is Overrated by Geoff Colvin
Outliers: The Story of Success by Malcolm Gladwell

If you dont know where to start on your way to financial freedom
these books you cant go wrong reading these books…


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