The Key to Successful Money Management

Since arriving in Pennsylvania I’ve been staying at my friend Tom’s house. His house is absolutely gorgeous, a showcase of good taste and money well spent. Tom is only a few months younger than me, and each staged room of his home reflects back to me my own monetary stupidity and foolhardiness.

He started with a home that had basically been stripped and in bad shape and then invested quite a lot of money and time into renovating it. He designed the architectural changes himself, and he saved money by hiring contractors during the off-season. The property appraises for far less than what he’s invested, but this is his castle, perhaps for the rest of his life.

Considering what I left behind in Oregon, my new apartment is pathetic. It’s the upper flat of a two-apartment building that was purchased by a friend of Tom’s from California who will be moving in sometime next year. Little money was spent renovating the upper flat because such decisions (and the money required to carry them out) are something only the owner can make. It needs a lot of work. But it’s dry and warm and it’s now home to me and my cats. And the rent is cheap. But I cried when I first saw my new home.

What makes the difference between people like Tom and me? I asked Tom how he got here. He has a very good paying job and makes a lot of money now. But we all know that earning a lot of money doesn’t guarantee financial success. According to The Millionaire Next Door (and Ben Franklin), the main key to wealth is spending less than you make.

If you know how to spend less than you get, you have the philosopher’s stone. –Benjamin Franklin

Tom tries to pay cash for everything. If he really needs something he can’t afford, he buys it on credit, but only if he can pay the debt off by the end of the tax year. When he started working he was making roughly $5.50 an hour. When he got a raise to $10, he lived on $7.50 (because California was expensive) and saved the difference. He continued this habit his working life.

And here’s the amazing part that people living on credit don’t appreciate: When you spend less than you earn and save the difference, you will have money to pay cash for things you need. Imagine that!

Society comprises two classes: those who have more food than appetite, and those who have more appetite than food. –Sébastien-Roch Nicholas de Chamfort, Maximes

Tom has also invested in appreciating assets. In the book Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!, the key lesson imparted by the rich dad is that money should be spent on appreciating assets, like homes, real estate, stocks, and bonds, and not on depreciating assets, like cars, motor homes, boats, and trailers.

What did I do? I saw something I liked, and if I couldn’t afford it, I bought it on credit. I carried the credit a long time giving away my earnings as interest, because I was so busy “consuming” that I couldn’t pay off my debt.

The credit industry worked on my ego by giving me a score that reflected my trustworthiness and success. And when it came to credit cards, no gold or silver for me. My card was platinum. I had a $15,000 credit limit. On just one card.

So the bottom line is to spend less than you earn. Period. Just start there.