The Most Crucial Money Lesson, in Three Words: Mind the Gap

The easiest way to achieve financial success is to mind the gap between how much you earn and how much you spend. Your job is to make the gap wider.
After I graduated from college and accepted an entry-level job, I received a starting salary of $21,000 per year.

Adjusted for inflation, that’s $24,100 in today’s dollars.

I was a diligent saver, even then. I directed 15 percent of my pre-tax income into my 401k and another 5 percent into a Health Savings Account. I forced myself to live on whatever was leftover.

(I freelanced in the evenings, and saved this money for travel.)

When I told the “grown-ups” around me that I was investing 20 percent of my income into retirement and health accounts, they complimented me. They told me I’m making excellent progress.

They were wrong.

I wasn’t progressing. Not really. Here’s the sad truth that nobody discusses: 20 percent of “not much” is not much.

Don’t get me wrong: I’m glad I did it. And I recommend it. Something is better than nothing.

But it’s not enough.

Even with a 20 percent retirement savings rate, I was still saving only $4,200 per year. That’s not even enough to max out an IRA.

Forget about amping up to “Full Max” Status, which happens when you max out your 401k, IRA and HSA. That prospect was literally impossible – it was more than my salary.

And if I wanted to save for the downpayment on a home? Or buy rental properties?

Fugghedaboutit. #NotGonnaHappen

Mind the Gap

In between “what you earn” and “what you spend,” there is a gap. Your job is to make this gap as wide as possible. Mind the gap.

There are two ways to increase this gap:

  • Earn More
  • Spend Less

Both are critical. But the more you make, the easier it is to save – and the more substantial those savings become.

You can’t Scrooge your way to freedom. Frugality is necessary, but not sufficient.

Earning more, on the other hand, fast-tracks your path to freedom in ways mere penny-pinching never could.

Let’s say you earn $30,000 per year. You’re a rockstar at frugality. You live in grandma’s basement. You eat Ramen noodles and wear used underwear. You sock away 50 percent of your pre-tax income — $15,000.

That’s not going to get you very far.

You can almost max out your 401k with that money. Almost, but not quite.

You can’t “Full Max” your retirement accounts. You can’t save for a house – unless you’re willing to rob your retirement contributions for funds. You’ll never become a landlord (unless you’re willing to look into those risky, no-money-down options, in which case you’ll be swimming in debt.)

But what if you earn $160,000 per year?

Your options explode. You can move into a nice apartment, drive a car, and buy produce at the grocery store – and still save 50 percent of your pre-tax income, or $80,000 per year, with virtually zero hassle or inconvenience.

(You’d live on $32,000 – totally reasonable for a single person or frugal couple — pay $48,000 in taxes, at an effective 30 percent rate, and save $80,000.)

You could “Full Max” every retirement account AND have enough money leftover to cash-flow a rental property, travel, buy your dream home, send yourself to grad school, or pay for your kids’ college.

Imagine buying a house. In cash. Every year.

If you’re a high-earner, paying cash for houses – consistently – isn’t that far-fetched.

Two Incomes = Turbocharge

Now, imagine that you’re part of a dual-income couple.

Two people can live almost as cheaply as one. You’ll share one mortgage/rent payment, one electric bill, one water bill. You’ll consolidate insurance accounts, cook in bulk, and perhaps even share a car.

Next, imagine that both of you are high-earners. Let’s say you make $200,000 combined. You live (pretty lavishly) at $40,000 per year. (That’s $1,330 per month for your rent/mortgage, and $2,000 per month for everything else.)

You pay $66,000 in taxes, at a 33 percent effective rate. You save $94,000 per year.

That’s $7,800 per month – in pure savings.

Once you start saving that much, freedom is just around the corner.

But you need to boost your income in order to get there.

Your mental bandwidth is limited
, and if you devote your precious brainpower to clipping coupons and chasing buy-one-get-one-free deals, you won’t widen the gap – not in any meaningful way.

Sure, you’ll pat yourself on the back. You’ll feel better about yourself. You can even brag to your friends: “Check out this free bottle of ketchup! I stacked a manufacturer’s coupon with a store coupon and then mailed-in a rebate …”


You’re chasing immediate gratification. You want the “buzz” of scoring free ketchup. But you’re not moving the needle. You’re not minding the gap.

Do You Want Immediate Gratification? Or Real Progress?

Without disclosing my actual income, I can tell you this much:

I max out every retirement account available to me: Roth Solo 401k, Roth IRA, and HSA. I’ve bought houses in cash. And I’ve travelled across Europe, the Caribbean, Southeast Asia and plenty of other corners of the globe.

If I still earned $21,000 per year, I couldn’t even think about doing this.

The more I make, the more substantial my savings.

The more I make, the greater the “gap” between income and expenses.

Mind the gap. If I can distill personal finance advice into three words: Mind the gap.

Focus on ramping up your income, while keeping your expenses the same or less. That gap will naturally grow wider and wider.

That moves the needle.

Want to Read About Accelerating Your Awesomeness?

Photo credit: Flickr / Powel Loj


  1. says

    I currently make a little over 30k at my day job and have 40k left in student loans. I’m hustling hard to make more income, which has been really good for me. I want to significantly increase my income — I think it’s the only way to go. There are only so many ways you can cut back.

  2. says

    Hi Paula,

    Thanks for the great read which I highly advocate as well. Earn more, spend less, and save the rest. It had personally worked for me by switching to a higher paying job and cutting down on unnecessary wants. It even helped me cleared my debt, get real serious about saving for retirement, and got me started on investing too!


  3. says

    You are absolutely right! I am the perfect frugality rockstar: although I earn only $5500 a year (as an MSc), it’s enough for living costs here in Hungary, and I also have an annual saving of $620. Ha! As an average 50 m2 flat in Budapest costs $44,000, I have to wait 70 years to buy my home in cash. :)
    That’s why I spend this money for travelling instead, and will never have my own place, except I find out how to make a better income (without moving abroad). :)
    Thank you for the inspiring post!

  4. says

    Great article!

    And to piggyback on what Melanie said in her earlier comment: there are only so many ways you can cut back, but there are a nearly-unlimited number of ways to increase your income and widen the gap.

    (The limits are time, energy, imagination, and determination. Not opportunities.)

  5. says

    You can buy rental property while earning little at a J.O.B. The first property you buy is what makes this possible: My first home (I owned some years ago, but lost them due to lack of knowledge) was a three bedroom bungalow. It was a Fannie Mae property that had water damage. I bought this home for 17,000 cash, some of which was financed by credit cards. The total rehab was between 8,000 and 9,000, for a total around 25,000. I immediately rented two of the three rooms for $100 per week each, for a total gross income of 10,400 per year! Now, every dollar I earn from a job can be saved! I currently just bought my fifth home “for cash”, again financing some of the cost with a credit card (about one-third of the 13,600 required at closing). I did work during tax season, but haven’t worked since. I do have opportunities to work, but don’t have the motivation to do so at the moment. I am enjoying the warm summer here in MI after the record-breaking winter.

    I should point out that I save every penny. I still drive a damaged 99 Chevy Cavalier that I purchased about two years ago for $2000. I had an oil change done for $5 using a Groupon, but don’t put money into it otherwise unless absolutely necessary. I don’t buy luxury items. I have a phone plan for $10 per month.

    It is possible to live on less.

  6. says

    While I enjoyed your article, I think it ignores the fact that for some people, their dream job may not make much. As a teacher, I make $42,000 a year. The most I could make would be around $60,000, through gradual raises. While I could look for side jobs, teaching takes up a significant amount of time and energy. However, I love my job and am passionate about it. Even if it means I can’t save as much as I like, I would rather be in a job I love than in a job I don’t like just to “retire” early. I would like it if some of your posts acknowledged the fact that not all people dream of becoming landlords and not all people CAN make more money, unless they want to leave the job they love.

    • says

      Hi Maggie —
      Andrew Hallam is a schoolteacher who earns a high salary and is a self-made millionaire. He retired in his 40’s so that he and his wife could travel the world.

      So obviously “I’m a teacher” isn’t a reason why this can’t work. You just need to be determined and resourceful when you adopt the Afford Anything philosophy into your life.

      How did Andrew do it? First, he upped his earnings by tutoring students during the evenings and weekends. This added thousands of extra dollars to his bottom line.

      Then he focused on investing that money. He joined Investment Clubs, networked with other investors, and learned everything he could about how to make that money multiply.

      He’s the son of a blue-collar worker, and a schoolteacher. He had no inheritance, no windfall. And he became a self-made millionaire through resourcefulness.

      But it all started with rejecting the limiting notion that ” I can’t save as much as I like” (false) and “not all people CAN make more money” (absolutely false). As long as you continue to believe those socially-imposed limiting ideas, you’ll be stuck. However, as soon as you shatter those limiting scripts, you’ll be free.

      Here’s Andrew’s book, Millionaire Teacher:

      • says

        I realize that I can make more money, but it would seem to me to be sacrificing quality of life. I would rather live on half of what I earn, save the other half, and be content with where I am, even if that isn’t wealthy. My point was more that I don’t necessarily want to retire early from a job I love and I certainly don’t want to feel like my free time is spent earning money by tutoring.

        • says

          hey Maggie,
          You’re definitely selling yourself short. As a teacher I would bet you have around 3 months a year to boost your income (SUMMER). Find a hobby that pays you? Income doesn’t have to feel like work. maybe you like gardening(start a community garden and charge for the space or sell your vegetables), lead a cycling or yoga class…

          For example I referee soccer on the side. I get to be around a sport I love and I get the-best-seat-in-the-house! I get to workout and I get paid to enjoy it!! Even better, the job is by contract so I pick games when I want and how often I want.

          As for the “retire early” financial freedom or the ability to retire doesn’t mandate you retire. It just makes your passion that much more enjoyable. You know you’re there because you want to be. Not because you have to be.

          hope this helps, best of luck.

          • says

            “Income doesn’t have to feel like work.” — Perfectly stated. That’s totally spot-on. I love writing (especially writing about money), and can’t believe I get paid for it. It’s income, but it doesn’t feel like work. It’s awesome.

            Like you said, financial freedom is all about choices. When you know that you’re working because you want it — not because you need it — you have exponentially more fun at your job. :-)

    • says

      @Maggie- I don’t think you need to become a real estate investor to live a better, more financially secure life. There are other passive investments you could make instead, such as passively managed index funds (in both retirement and non-retirement accounts). Granted, this is not as much a cashflow play as real estate, but you can definitely build a ton of wealth.

      I don’t think you need to quit your job either. I object to your false dichotomy of “low paid work I love OR well paid work I hate.” I would challenge you to expand your creativity a bit and see if there aren’t more ways that you can achieve what you want.

      If you read this blog and others like it, I assume you are at least somewhat interested in financial freedom, travel and the like. Well, what do you want? How can you get it? To reuse an old quote, “If you think you can or think you can’t- either way, you’re right.”

    • says

      That’s a hard one, Maggie. I come from the side where I have gotten increasing amounts of money thrown at me since I finally found a situation (in my case, employer) where I am highly rewarded for additional work and improvements … and that is just one issue with others saying “just earn more”.

      I’ve considered flat-out leaving just to do something different, but after thinking about the tradeoffs, I will stay for a while, and I probably feel some of the same things you do. I’m projecting here, but …

      I wonder how long it’d take to find another employer who appreciates effort or how long it’d take to build a business myself …

      The opportunity cost of quality training AND the risk of simply failing at switching careers together is high …

      The thing I *don’t* have is any obligations to others, so from that standpoint I’m free. But you may be, too. Have a talk with others. In the extreme case, you can learn to write computer code using Ruby in a “boot camp” (during a month on the West coast of the US for $15k of classes if getting specific) and see about nailing $80k/yr with that immediately afterwards. It’s seriously a reality if you’re up for it.

      It’s scary, it does have risk, but the job market for software right now is **nuts**.

    • says

      There are many ways to earn incredible living being a teacher. Much respect to you for teaching, and doing a job you love.

      People have gotten trained by society to think like you do, I know I don’t know you and nothing but respect here, but realize that this is not an either or situation.

      Think of teaching with an entrepreneurial mindset.

      and please don’t discount that this is a crazy idea, there are many examples of this…

      I hope this helps….

  7. says

    Definitely true. I’ve been working on increasing my income and it has really helped me put away more cash. Sure, it’s still not enough, but I have plans to increase my income a few hundred dollars a month (if I work it out right, it might even be more.)

    As for Maggie above, I’m also a teacher and have started to sell my lessons and activities on TPT. I just started out and haven’t made thousands like other TPT sellers, but I have high hopes. There are always ways to make more money no matter what your occupation is. :)

    • says

      @Little House — I just Googled “TPT” after I read your comment — what a cool website! I love that you’re selling your lessons to other teachers … that’s awesome! What a creative and resourceful way to make extra money. And it’s a win-win for both sides, since the buyers are receiving something ultra-valuable! :-)

  8. says

    I definitely agree with your point, but making the leap from $20,000 to $160,000 a year doesn’t just happen. That type of salary is rather hard to come by. I have a plan to increase my income, but for a couple of years I’m going to have to continue working in my chosen field, which does have a ceiling. This post is very motivating, but I think we’re all left wondering how to make that big salary jump.

    • says

      @Mike — You make that leap step-by-step. Success doesn’t happen overnight. But you ramp-up from $30,000 to $50,000, and then to $70,000, and then to $90,000, and then to $110,000, and then to $130,000, and finally to $150,000. And you keep going from there.

  9. says

    I agree mind the gap, and that usually means cutting spending because most folks spend all they make. IT takes a shift in thinking to making more money, it is possible, and if you use the word can’t you are limiting yourself.

  10. says

    I LOVE this article!!! i just shared it on google+, Facebook, etc… Mind the gap. You have to bring the INCOME up. I have friends who are teachers and every summer they are working two jobs just to boost their income to survive the rest of the year. I have friends who are teachers but instead used the North Carolina and Texas home buying incentives for teachers, military and police officers to buy a duplex. Now they are living big on a teachers salary because they have very little expenses. Making more income and investing is the way to go. I have found 30k-40K houses in texas on the outskirts of the city and they rent out great boosting my income to come up with the downpayment as we speak. Keep up with the great articles.

  11. says

    Determining what you can do to make real progress is important. I think you are right that people ought to consider what is possible at reasonable and best case scenarios. If things are looking pretty impossible, then you ought to seek out a better income without increasing your cost of living.

  12. says

    Interesting read, it definitely gives me some thinking to do.

    Currently I’m on the dairy farming path and surrounded by the “poor farmer” mentality. It is a family farm which is on the cusp of a generational shift. Unfortunately there is no real written plan for the farms future. I am talking and asking questions, we’ll see how things go. My own personal plan is to stick around for another year to see how discussions go and if people are willing to work together. While I don’t mind farming I want to make sure it’s a sound investment and not my sole investment. I know I can make at least an average living farming but as we all know that’s no fun. 😉

    I do have Red Seal in plumbing so I can squeeze in odd jobs here and there. If need be I can leave farming and make plumbing my main income. Real estate does sound interesting though not something I can jump into right at this juncture. So much to think about. i guess the best I can do is work with what I have while continuing to plan and learn.

  13. says

    Hi Paula,

    I love this article so much that I put it in my top sites. It’s there to remind me where I’m headed when I feel like I’m spinning my wheels. Today, when I opened it, though, something jumped out at me:

    “But what if you earn $160,000 per year?

    Your options explode. You can move into a nice apartment, drive a car, and buy produce at the grocery store – and still save 50 percent of your pre-tax income, or $80,000 per year, with virtually zero hassle or inconvenience.

    (You’d live on $32,000 – totally reasonable for a single person or frugal couple — pay $48,000 in taxes, at an effective 30 percent rate, and save $80,000.)”

    Here’s a chance to add more to that savings account. Since only part of a person’s income would be taxed at that high rate, a person making $160K/year (with only one deduction for himself) would actually only pay $35,134; leaving almost $13,000 more to save. An accountant or tax professional would find more ways to lower the tax bill.

    Now, if I could just figure out a way to come up with an extra $13,000 in my life! Anyway, I want to say thanks for writing this blog, Paula. I heard about you on Bigger Pockets, and you’ve been very inspirational to me.

    • says

      Hi Norma! Thanks so much for writing — and thank you for loving the article so much that you reference it when you need a “reality check” (“freedom check”)!

      Yep, the lower you can legally get that tax bill, the better. The marginal tax rate for someone earning $160,000 (as of 2013) is 28 percent at the federal level, although like you said, that only applies to a portion of their overall income. But that’s only for federal taxes; state tax varies from 0 percent to 10 percent, depending on where you live. So I figured that for the sake of example, I’d round it to an even 30 percent.

      If you live in a state with no income tax (Texas, Florida, Nevada, and several others) and you have a great CPA who can help you find deductions, all the better! The more you keep, the more you can invest.

      Thanks again for writing, Norma!

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