The Single Formula for Wealth

By J.D. Roth, Forbes Magazine

The basics of personal finance never change. They haven’t changed in thousands of years, and they’re not going to change for thousands more. Fundamentally, all you need to know about managing your money is this: Spend less than you earn.

That’s it. If you spend less than you earn, you’ll do fine. Everything else is details. Those details are important, I know, but most of them are common sense and widely known.

The basics of personal finance

Smart personal finance can be reduced to one simple equation:

[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

If you spend more than you earn, you have a negative cash flow. You’re losing wealth and in danger of going into debt. (Or, if you’re already in debt, you’re digging the hole deeper.) If you spend less than you earn, you have a positive cash flow, which will let you climb out of debt and build wealth.

So, basic personal finance comprises three essential skills:

• Earning — Your ability to bring in money. This skill requires resourcefulness and a willingness to work.
• Spending — Your ability to live frugally and spend wisely. This skill generally requires sacrifice and the ability to prioritize.
• Investing — Your ability to produce a surplus and to make that surplus grow. This skill takes patience and research.

Spend less than you earn — invest the difference. That’s all you need to know. The rest is developing the mindset and skills to make these things happen.

The basics are the basics for a reason. And until everyone grasps the concept, the fundamental formula of personal finance needs to be trumpeted from the rooftops: To build wealth, you have to spend less than you earn. It’s not new. It’s not unique. It’s simply the truth.