Earning, Spending, and Saving: The Building Blocks of Personal Finance
Written on April 3, 2011 by Cheryl Rankins
A couple of weeks ago, Robert Brokamp explained how living below your means is like saving for retirement twice. On the surface, his advice was pretty conventional: The more you save today, the more you’ll have tomorrow. This is similar to a point I’ve been repeating for the past five years.
Smart personal finance can be reduced to one simple equation:
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.
But as I was editing Brokamp’s article, I had a flash of insight. What Brokamp was trying to say — and what my little equation tries to quantify — is that basic personal finance comprises three essential skills:
- Earning — your ability to bring in money.
- Spending — your ability to live frugally and spend wisely.
- Saving — your ability to produce a surplus and to make that surplus grow.
Some folks are good at one skill, but not the others. (Maybe you’re good at keeping your costs low, for instance, but struggle to earn money.) Other people are good at two of the skills, but fall down on a third. 
(You might have a good income and keep your costs low, but have a small nest egg because you lack skill in saving.) And still others are passable at all three skills — not really excelling, but not failing either.
To be truly successful at personal finance, you have to maximize your performance in all three areas.
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- Break Out of Your Personal Finance Slump
- The Truth About Tax Deductions
- Do Rich People Need Credit?
- Debt Reduction and Savings Statement – April, May, June, July 2010
