If I could boil my entire personal finance ideology into 6 words it would be this: Grow the Gap. Guard the Gap. If I could share a message with families struggling in poverty I would tell them: Grow the Gap. Guard the Gap. If I could share with young adults in college I would say: Grow the Gap. Guard the Gap. If I had a few minutes to talk with middle income and high earners, I would advise them: Grow the Gap. Guard the Gap. If you want to know how to went from from $50,000 in debt to over $500,000 net worth in 15 year on medium sized income: We grew the gap and guarded the gap.

These 6 words are the path to creating more financial freedom.

What is the Gap?

We aren’t talking about overpriced clothing here. The Gap is the space between our expenses and our income.

If we earn $4000 a month and spend $3800, we have a $200 gap. If we earn $1700 and spend $800, we have a $900 gap. If we earn $3500 a month but spend $3900, we have a -$400 gap. (Negative gaps are bad, real bad)

Depending on where you are in life there are different areas you will need to focus on. Sometimes we are tempted to major in the minors. Instead, let’s pick the area that will move the needle the most. Instead of looking at what we can’t change, focus on the areas we can change.

Grow the Gap

How do we go about growing the gap between our income and our expenses?

Reduce our expenses

There are 3 basic kinds of expenses we can look at.

1. Fixed Expenses: These are things that we get a bill for each month. Our cell phone, car insurance or rent. One by one we can look at each cost and figure out if we can cut or reduce the expense. Because these expenses happen over and over, one change could help us grow the gap on an ongoing basis.

When I was in college, and newly married, we lived in married student housing. It was affordable and a good option. But then I realized that we could move into a travel trailer and save about $150 a month. It was a big change for a small cost savings. But it helped us grow our gap by lowering our cost, and we funneled that savings into paying off our credit card debt.

We still look for ways to cut our fixed expenses: from renegotiating our gym membership (we saved $20 a month!) to testing out if I can live without a cell phone! (I’m 2 week sans cell phone so far! I’ll decide in another 2 weeks if I can do this permanently.)

2. Flexible Expenses: These are things like gas for our car, food, and entertainment. Over time we can learn to reduce these costs. We can learn to cook from scratch (how we cut our food bill in half!) We can adjust to biking to work. We can find new ways to have fun with our friends that aren’t so expensive. Tackle them one at a time to slowly grow your gap.

3. Debt Repayment: We have two options with this. Pay it off, or get rid of it. If you have a car loan, you can work to quickly pay it off or you can sell the car and buy a car you can actually afford (aka pay cash for). Car payments, student loans, medical bills, credit cards, mortgages. As you pay these off, it will grow the gap between your expenses and income. How much more gap would you have without a car payment, credit card debt, or mortgage?

Increase our Income

1. Ask for or earn a raise:Do great work, consistently. If you can ask for a raise, ask. If you have to earn it through performance reviews, try to earn it. If you have grown your skill and ability, and you can’t get a raise, you can look at other companies who would value your work.

For low or high earners, switching companies can be a fast way to grow your gap. I once switched from a job earning $9 (with little career growth options) to one starting with a $12 base plus commission. I was then promoted within 8 months. In less than a year my hourly income shot up from $9 to $16-$20 an hour range.

2. Earn extra income: You might be able to work extra hours for extra pay if you are hourly. Or you could start a side hustle (side job). Especially if your income is low, finding ways to increase it is key. If you make $9 a hour, adding a house cleaning gig where you earn $12 an hour will be a huge boost.

Guard the Gap

I don’t care if your yearly income is $25,000 or $150,000. Guarding the gap is hard. It goes against everything in our culture. We will bump up against all sorts of internal struggles, and external pressure. That extra cash in our pocket has a way of catching fire and burning a hole right through.

Growing the Gap takes hustle and hard work.

Guarding the Gap takes emotional strength and vision.

But you will never have financial freedom without it.

Don’t buy everything you can afford.

So now you can “afford” a nicer car, better vacations, eating out, a bigger home, whatever. Don’t buy everything you can afford. Just don’t. (this is a full post, coming soon!)

Pick a few things that are your deepest values, and spend a little cash there. My money mentoring program starts with some life planning exercises, because we have to figure out what those “most important” things are, so we can create a plan for affording them. For some it’s being able to live in a certain area, some it’s a vacation cabin,  or for others it’s doing work they are really excited about, or seeing the world, and for Mr. Montana it was a lovely classic car. For me, it was traveling/camping with our kids. Some people just want to have more time. Time for their kids, families, friends, hobby’s, or vacations. If they could carbon copy their life, except with 20 hours of work a week instead of 50, everything would be 1000x better. Maybe paying off all their debt and home could do that for them. So in that case, spend the cash to pay down your debt.

With everything else, be crazy frugal.  Guard the Gap.

Guarding the Gap is the ticket to your financial freedom. Don’t trade your freedom away.

After we adopted 3 kids, it seemed like everyone was asking “So when are you moving into a bigger house?” Then we found out we were expecting a baby! So it seemed like at least once a week people were demanding, “You are going to be moving SOON, right?”

See, our little family of 7 lives in a cute and comfortable 1650 sq ft house. It has 4 bedrooms and 2 bathrooms. It has a very nice fenced yard, complete with 2 full grown apple trees, patio, garden boxes, swing set, trampoline, raspberry  and strawberry patches, a few blueberry bushes, an herb garden and a little duck yard/house. It’s not huge or fancy. But we have remodeled every space, and it’s just how we like it.

When we looked into the cost of finding a place just as nice but bigger, it would have been another $100,000-$150,000 in mortgage debt. That means we would still have to be working the 9-5. We would have more space (that needs cleaning), but it would have stolen away our financial freedom. All the amazing, cool things that we get to do would have to be set aside for “some day” instead of right now.

We could have traded away our dreams for a 1000 sf upgrade. 

We Guarded the Gap instead.

After so much struggle to Grow the Gap, we feel like we ought to be rewarded with upgrades. Fill in the blank for whatever that is for you. Lifestyle inflation happens at every income.

What to do with the Gap?

OK, so now you have this really great gap. Your expenses are lower, your income is higher. You are feeling flush with cash. What exactly do we do with this?

1. Pay down debt:

Use the gap to pay off your credit cards, medical bills, student loans or mortgage. As you pay each item off, your gap will grow even more. As your monthly nut (expenses) go down, your freedom and flexibility increases!

2. Build an emergency/life transition fund:

Emergencies will happen. By having an emergency fund it will help prevent future debt, and provide security. If you want your life to be different (different work, different location, or take a gap year), start building a cash fund that could make it happen.

3. Save for large purchases:

Save up cash to buy your next car. Start saving for the down payment on a home (or to pay cash for a house!). If you can put 20%, 40% or 60% down on a home, your payments for the next 30 years will be smaller (growing the gap). And because you have been saving that money each month, you will have the gap to help pay off the mortgage faster. If you have been saving $1000 a month for 3 years, the $36,000 down payment will lower your mortgage cost. Plus you can start funneling that $1000 toward paying down that new debt.

4. Invest:

By investing in stock index funds, or real estate you are using that money to start growing future income. Invest your gap today, and it will start providing income in the future.

Grow the Gap. Guard the Gap.

If you want to have a life with more financial freedom, more adventure, chasing down your biggest dreams, financial security, living generously, creating fun and meaningful work: Grow the Gap. Guard the Gap.

For Conversation:

Is there one or the other that is more challenging?

What are a few things worth spending your gap on?

Have you noticed the temptation to “major in the minors” with this idea? Like people with really low income just focus on clipping coupons and super high earners ignore the fact they spend 99% of their income and just try to earn even more.

Random thoughts: I found that old paint set from my art class in Amsterdam for this image. When I said, “paint with words” I did not mean I could actually paint words! =) Although my 9 yr old thought it was amazing. Gotta love kids. So easy to impress!