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By Jed Collins — The following is adapted from “Your Money Vehicle.”

Personal finance doesn’t have to be complicated. In fact, there is a “golden rule” that everyone should follow, and simply by adhering to it, you’ll be on a path to financial freedom. 

The Golden Rule is this: Don’t spend more than you earn, and focus on what you can KEEP!

Whether you’re failing to save enough for the future, living paycheck to paycheck and spending everything you earn, or actively accruing debt, following the golden rule will help you control the flow of cash out of your bank account, and help you plan for long-term financial success. 

Let’s take a look at how you can apply the golden rule so that you can start applying it to your life now. 

Preparing for the financial winter

It can be difficult to wrap your head around all that personal finance comprises, so let’s start with an analogy to make it easier. Try to think about your financial situation in terms of a cabin, a stack of wood, and a fire. 

Imagine that you have lived in this log cabin in the woods with only a wood-burning stove to provide you warmth through a long winter. When the first cold night comes along, and you start putting logs onto the fire, you will look at your wood supply and think one of two things: “We are going to burn through the supply too fast,” or “our wood supply will last through winter.”

The logs, in this analogy, represent your cash management. Going out in the world and earning money is like going out to chop down a tree — and what you spend is like throwing wood on the fire. 

If you understand how to both increase your wood supply and burn a little less, then your wood supply begins to grow, or at least be maintained. Having confidence in your ability to grow or maintain the wood supply will allow you to enjoy the warmth from the fire (and maybe even a s’more or two!) instead of constantly worrying about needing to chop more wood.

Every path to financial freedom begins with learning about managing your money, and making sure you are prepared for the metaphorical winter. 

Tips for following the golden rule

Let’s recap: The golden rule is don’t spend more than you earn, and focus on what you can keep. Maybe it sounds obvious, but you’d be surprised at how many people don’t understand or follow this rule and end up in debt. 

Look at credit card use as an example. Credit cards make it easy to spend money you don’t have (borrow, in other words), so you may be instantly breaking the golden rule without even realizing it!

Here are three tips to help you follow the golden rule: 

1. How much wood you chop = how much money you earn

If you only look at your gross income amount, you will end up breaking the golden rule. This is like weighing a tree that you’ve chopped down to anticipate how much wood you’ll have to burn, but forgetting or ignoring the fact that you won’t be using the branches. 

Remember:

Building your plan based on the gross amount you earn shows that you do not have a clear understanding of the many things that will impact how much you actually take home. Begin to build your plan around your net income — which is the amount remaining after taxes (both state and federal) are taken out.

2. How much wood you burn = how much money you spend

Money can be spent in endless ways, and each expense can be categorized into buckets. You must begin to manage this system and take note of how much goes out, and where it is going. 

This practice will show you which “Money Bucket” you are prioritizing and filling. You have five choices with every dollar you make — do you know which bucket you are filling?

[Money Bucket Video]

Your Past Choice Bucket is full of the debts and bills that — no matter what happens that month, that money will need to be spent before the month ends. For example, rent and credit card payments are due each month, regardless of circumstances. 

Your Present Choice Bucket is filled with your daily expenses, and will fluctuate each month, depending on the habits you form and the choices you make. For example, lunch, gas, and online shopping. 

3. How much wood you stack = how much money you keep

Throughout history, humans have seen a warm fire, and a big wood supply, as a sign of security. In today’s world, that same feeling can be had with a solid money supply. Once you realize the amount you keep gives you flexibility and control over the future, you see how important it is to have. 

If you have extra wood, you can build a house, trade with a neighbor, or build a bigger, warmer fire. Think, now, about what you can do with excess money?

How does your spending add up?

Why start with the golden rule? It is the first step in any plan and the beginning of investing. If you spend more than you earn, you will never have anything to invest or save. 

As such, understanding how much you earn and how much you spend each month is the first step in achieving your financial goals. Follow the golden rule, and you will be well-equipped to avoid the pains of a long, cold winter! 

For more advice on financial planning, you can find Your Money Vehicle on Amazon.

Jedidiah Collins, CFP® is a behavioral coach and founder of Rookie to Veteran™. After being signed as an undrafted free agent in 2008, he played seven seasons in the NFL while studying for his certification in financial planning in the off-seasons. Today, Jedidiah’s mission is to empower students, athletes, and young professionals with the behaviors needed to eliminate the gap between the potential of their goals and the success they desire! In addition to his work, Jedidiah is a speaker, commentator, and—most importantly—a husband and father.