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Note: This is the second of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed

Spending less than you make is a principle that a lot of people in the States and in the world have trouble with. An average American today spends 108 dollars for every 100 dollars that he makes. We are spending 8% more than we make and since this is the average there must be people who spend 2, 3 or four times more than they make.

Guess, where does most of the money we don’t have, come from? Credit cards!

In comparison the average person in China spends about 50% of what he makes. This means that in China an average person spends 50 dollars for every 100 dollars(or yuan/renminbi) they make and saves the second 50 dollars.

 From the view point of finance and specially personal finance what China is doing(saving) is good and what the US is doing(spending the money we don’t have) is bad.

The problem with debt is that it has to be paid back. For an average American who spends 8% more than they make this means that when repaying your debts you will get to keep 92 dollars for every 100 dollars you make. But since we also have to take into account interests that almost every loan in the world comes with - it will more likely be that you are left with 70 dollars. And remember - you have to use these 70 dollars to buy all the stuff you used to by for 108 dollars. There is just no way you can do this without lowering your standard of living. Check out my article What’s wrong with most „Get out of Credit Card debt” tutorials? for some pointers about getting rid of credit card debt.

The spend less than you make principle is actually a derivative from the “pay yourself first” rule, which in my opinion is the most important principle of getting rich. If you are paying yourself first then you are also spending less than you make (unless you are paying yourself first and then living on credit cards which is a very stupid thing to do and I have no idea why anyone would do something like this).

Spending less than you make is psychologically difficult to do. When one achieves a higher position at work he automatically wants to show his success to the world - and what better way than buying new shiny things, right? Wrong! While shiny things are good for showing off they will almost always loose value over time - this means that instead of making you richer they are making you poorer. For instance after driving a new car out of the car dealer, it’s value drops more than 20%. In order to increase your net value one would need to buy things that go up in value or invest money.

Spending less than you make is the prerequisite for being able to invest your money. The money that you will not spend will make you rich because it will generate you interest.

Thanks to the way compound interest works the money that you saved by not spending it will after some years make you more money than the actual amount that you saved in the first place. Compound interest is also the reason Why Warren Buffet doesn’t like to spend money.

How to spend less than you make

Spending less than one makes is tricky because of the natural law of money - our spending habits will expand by the additional amount we have available. This is a golden rule and will work always unless one starts to think about his spending habits and patterns. The good news is that you only need to start thinking about the way you spend your money and the spell of the natural law of money gets broken.

Good practical advice is that every time you get a raise or an extra income you should take half of this money and spend it as you like. After all, you have earned it with your hard work and are worth to loosen it up a bit! The second half of the extra money you should keep - and by keeping I mean pay it to yourself. If you follow this advice, it means that every time you get more money you will be able to spend more but at the same time you will also save more. - you get the benefits of both!

Shawn at Watson Inc put it this way: Financial intelligence is not measured by how much you make but rather by how much you keep.