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The greater the gap between earning and spending, the faster you build (or lose) wealth. This may seem obvious, but smart personal finance really is this simple. Everything else—clipping coupons, saving for retirement, asking for a raise—is done in support of this basic idea.

Tip

Only two things will increase your cash flow: spending less (Chapter 5) and earning more (Chapter 6).

Here's an example: Joe Spendsalot has been living paycheck to paycheck, making minimum payments on his $5,000 credit card debt. Joe brings in $2,500 per month after taxes, but he spends $2,600 a month, including $100 per month on his credit card bill, which barely covers the 15% interest. Because he spends more than he earns, his cash flow is negative, and he's sinking into debt.

Salary

$2,500.00

Rent

$1,000.00

Car Payment

$250.00

Credit Cards

$100.00

Food

$500.00

Utilities

$250.00

Other

$500.00

Income

$2,500.00

Expenses

$2,600.00

Cash Flow: $2500.00 – $2600.00 = –$100.00

Eventually Joe realizes he can't continue to spend more than he earns; he's just digging himself a deeper hole. He decides to make some small changes to cut his costs, including biking to work and using the public library for free entertainment. Together, these save him $100 per month. Now his monthly income and expenses are both $2,500, so his cash flow is zero: He's not saving anything, but he's not taking on any more debt, either.

Joe continues to pay $100 per month to his credit card bill, but the balance never seems to drop. Running the numbers, he realizes that at this rate it'll take him decades to pay off his credit card. In fact, according to the Federal Reserve's credit card repayment calculator (http://tinyurl.com/CCcalculator), he'll be paying on that debt for 24 years.

Joe decides to increase his cash flow by taking a part-time job at the local mini mart, where he earns an extra $250 per month. He also cancels his cellphone plan, begins cooking more meals at home, and switches to store-brand groceries, all of which saves him $250 per month.

Salary

$2,500.00

Rent

$1,000.00

KwikMart

$250.00

Car Payment

$250.00

Credit Cards

$100.00

Food

$350.00

Utilities

$150.00

Other

$400.00

Income

$2,750.00

Expenses

$2,250.00

Cash Flow: $2750.00 – $2250.00 = +$500.00

Now Joe's bringing in $2,750 per month after taxes and spending $2,250 per month, giving him a positive cash flow of $500. If he's disciplined and uses all this surplus to pay down his credit card, he can be debt-free in just 9 months. And once he eliminates his credit card debt, he'll no longer have that $100 monthly payment, so his monthly cash flow will increase to $600. He can quit his job at the mini mart and still set aside $350 a month for saving and investing—and fun.

You might be saying "There's no way I can find an extra 600 bucks every month!" That's okay. Say you can manage to cut your spending so that you have a positive cash flow of $100 per month. Psychologically, the difference between losing $100 each month and gaining $100 is huge: It's the difference between feeling like you're being buried alive and feeling like you're climbing out of the pit. Even if your $100 positive cash flow is all going toward debt, you're still making progress.

People make these sorts of changes every day. In fact, this is exactly how I, your humble author, got out of debt (see the box on The Basics of Debt Reduction), and how many of the readers at Get Rich Slowly (www.getrichslowly.org) have done the same.

The bottom line is that in order to conquer debt you need to have a positive cash flow. We'll explore ways to cut your spending in Chapter 5, and we'll boost your income in Chapter 6. For now, let's look at how to use a positive cash flow to pay off debt.

Your Money And Your Life: Saying Goodbye to 20 Years of Debt

How can I be so sure that the techniques discussed in this book will help you get out of debt? Well, I can't