Tuesday, September 29, 2020

The Gap

 As mentioned in my previous post, the gap is the most important factor in building wealth.  What, you might ask, is the gap?  Well, the gap is simply your income minus your expenses.  The larger the gap, the easier and quicker it is to build wealth.  You can make progress with a small gap, but the progress will be slow and not very motivating.  You may have also guessed that if your gap is negative, you are heading in the wrong direction.  You are losing ground and your trajectory is unsustainable.  It is not enough to just consider the idea of this gap, you need to discover what your gap is and track it.  Keeping an eye on my gap over the years has helped me become a real millionaire.  Each month for the last 16 years I have tallied up my income and expenses.  Here is a chart with my average monthly expenses vs. income each year since I started keeping an eye on this.

   



  There are several important pieces of information I want you to see by looking at my income and expenses.  

  • I have consistently lived below my means.  In 2005 my wife and I made a combined income of $5,000 per month.  However, we lived so frugally that we only spent $2,000 per month.  Now at the time, it was just the two of us, so this was easier to do.  We were basically 23 year old college kids, but we were able to save $36,000 in our first year of marriage.
  • This has been a wealth building journey.  This process has played out for us over 16 years, this approach is not a get rich quick approach.  However, this approach is available to most people.
  • We have allowed and enjoyed some lifestyle creep.  As our income has gone up, we have loosened the purse strings a little.  It is important to enjoy money.  We aren't as tight as we used to be.  However, we have always paid attention to maintaining or increasing the gap between our income and expenses.
Some of you may be thinking, "of course you can build wealth, you are bringing in $11,000 per month!"  I'd like to point out that in the first 6 years we averaged about half that income, but still managed to save a large chunk of that income.  You simply have to adjust your lifestyle to maintain a gap between income and expenses.  In the next several posts, I want to share some of the strategies that I've used to help keep my expenses in check, so stay tuned.

1 comment:

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The Real Millionaire

 I am a 39-year-old man with an amazing wife and 4 awesome kids.  I am also considered a net-worth millionaire.  Achieving this goal has alw...