This is Part I of a 5 Part Series, How To Achieve Financial Independence

Today we are going to talk about the first step in The Formula For Financial Independence, Earning More Money Than We Spend.  I decided to write about these steps individually, because I believe they are so important to your financial health. These steps shouldn’t be glossed over one time.  They should be read, printed out and become a part of your life.  I believe they are that important.  As you read the steps, think about them and where you are today.  Be honest but don’t judge yourself.   Understand how ignoring these steps may have affected you throughout your life. Then ask yourself, how aiming your sights towards financial independence, would change your life.  Remember the “magic” of the formula is doing the steps in their respective order.

When we earn more than than we spend, we have money for savings, we are able to  get and stay out of debt, we are able to contribute to our emergency funds, we can invest in ourselves and other opportunities, we can start our own business, we are able to set and achieve short and long term goals, we gain financial peace of mind.  When we earn more than we spend, money becomes a positive force in our life. When we ignore this rule, our life can get out of control and turn us to misery.  So, what happens when we ignore this rule of earning more than we spend?  We don’t want to focus on the negative here, but we need to be realize the consequences of not following this rule, as the following statistic points out:

Bankruptcy filings in 2009 reached 1.4 million, up from 1.09 million in 2008. (Source: AACER, the American Bankruptcy Institute, January 2010)

This Grand Law does not just apply to individuals.  It applies to individuals, companies and governments.  Most likely, you’ve noticed the debt crisis going on around the world (California, Greece, U.S. debt).  How do you think all of these entities got into trouble?  Mainly because they spent or committed more than they earned.  They ignored this simple rule and now the chickens are coming home to roost. It doesn’t have to be this way. You have a choice.  This is how Charles Dickens put it many years ago:

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” – Charles Dickens

Your Existing Relationship With Money

We have an existing relationship with money; one we’ve developed over the years.  Some of us were fortunate to have parents or teachers that taught us about money.  Others of us have to learn these lessons on our own.  For those of us who never learned about money or finances, it’s an area that we would rather avoid and just not talk about, right?

I first learned about this relationship during my senior year in college, when I was taking Research Methods In Psychology.  I can remember every time our teacher would talk about concepts like regression analysis, a look of agony would come across my classmate’s face.  The look of dread was like a conditioned response.  Yet, many of these same people would be more than willing to line up for their first Capital One credit card as the numerous credit card vendors set up shop and visited campus regularly. So, right out of the gate, one of the first things many of us do (professionally) is to go right into debt and get on “the wrong side of money.”  We start off owing more than we make and just continue to get more into debt.  Then, we wonder what went wrong.

The Lies We Tell Ourself

Right about the time we realize things aren’t  working out financially, we have a tendency to look for excuses or ways of validating spending more than we make.  Here are some of the things we tell ourself so rationalize our behaviors of spending more than we earn:

• I’m in college now, so I can’t work.  Therefore, it’s okay that I go into debt.  Besides, I’ll get points and none of my friends work.
• I have kids, so I can’t work now.  That would be harmful to them. Have you seen the cost of day care?  I don’t want to be considered a bad parent.
• It’s the economy.  There just aren’t any good jobs anyway.  Why bother! Worst case scenario, I can always just walk away from my mortgage.  After all, “everyone” else is.
• I’ll just take out another credit card for $10,000 until things get better.
• Once I make “The Big Sale” everything will be okay.

I will be the first to admit that life circumstances can contribute to our situation.  But do they determine our destiny?  Only if we let them. This is what you should consider:  Although many of these circumstances can “become your current reality” anyone who has ever reached financial independence does not think this way.  After all, these circumstances can  be worked through and solved.

The Solution

Okay, so we realize that the first step in The Formula For Financial Independence is to make more than you spend.  This may take you anywhere from one week to six months to achieve – but it has to be done. Here are the 2 very simple steps you need to take right now before we move onto step 2.

Step 1 – Determine Your Current Monthly Income Versus Monthly Expenses – During this process, look for ways to lower your monthly expenses.  Here are some tips to get you going:

Step 2 – Raise Your Monthly Income To Where It Exceeds Your Expenses By 10%-20% - This is required so that you can begin to pay down debt and develop an initial emergency fund.

Are you telling yourself that certain jobs are beneath you? Or, that you refuse to work a 2nd or 3rd  job? Then, your desire to be financially independent really isn’t that strong.  I am not talking about doing work that you hate forever.  Step 4 is all about Doing What You Love.  Remember, this is a 5 Year (or shorter) process, not a lottery ticket.  Most people never reach financial independence because they ignore this concept for their entire life.

What we are talking about here is learning how to run your life like a business FIRST where you MASTER the simple concept of earning more than you spend.  There is great benefit in doing this.  Sometimes, we have to do the uncomfortable in order to get where we ultimately want to be.  But it is worth it.  When you turn the tables and stop living beyond your means, you are taking the first step in gaining control of your financial future.

Once you have determined where your monthly income is versus your monthly expenses, it’s time to put a game plan together.  If you are married and/or have a family, you need to include them into your plans.

1. Select 3-5 Career Subjects you like and find interesting (things like photography, pets, art, music, books). These should be fields you would enjoy working  in.

2. Brainstorm for ideas on how you can make extra money (ideally) doing something related to one of your favorite subjects above.  This doesn’t mean that you have to do something you love.  For example, you may find that picking up a 2nd job delivering pizzas fits your schedule and allows you to make and extra $300 per week.

In order for this to work, we need to raise your monthly income to where it is at least 10% – 20% higher than your total monthly expenses.  So, if your monthly expenses are $2000 (for everything), you need to get your income to at least $2200 and ideally $2400 or more.  This will  provide the fuel for our next steps.

I realize doing this may seem hard.  To a lot of you it may seem impossible.  I am not going to lie, it’s going to take a commitment on your part. But how is your current philosophy working out? Let me explain put it into perspective:

In order to achieve financial independence: a world where you are free from financial worry and chaos, where you are financially secure and able to do what you want, when you want, you are going to have to make sacrifices.  I would be lying to you if I told you any different.  I am not selling you an opportunity or an investment.  I am sharing with you the basic building blocks for creating financial independence.  The $ millions can and do come in time.  But first, you must learn and live by this simple rule.  I will tell you from personal experience, it is well worth it.  You have to believe you are worth it.

If you are comfortable, please share your thoughts on Earning More Than You Spend and how you plan to achieve this step towards your financial independence.

Here are the 5 Steps For How To Achieve Financial Independence

Step 1 Earn More Than Your Spend

Step 2 Get Out of Debt Now

Step 3 Accelerate Your Savings

Step 4 Become An Expert At Something You Love

Step 5 Accelerate Your Income Build Wealth