Brother Can You Spare A Minute?

“Mind the gap” is a warning to train passengers to remind them of the sometimes significant gap between the train door and the station platform. - Wikipedia

Minding the gap is also the key to financial freedom. The key to amassing wealth is not to make more money. If every month you spend more than you take in you don’t have wealth, you have debt. That’s true if you make minimum wage or if you make $250,000 per year. “The gap” is the difference between how much you make and how much you spend. By focusing on making this number a positive one and increasing it over time you build the foundation of financial freedom.

What is your current financial focus? Dollars to donuts more people who read this article will know how much money they have in their 401K or whether the DOW finished up today than can state their personal gap for last month. On one level, “the gap” is a small thing. But, if you take care of the small things, the large things take care of themselves.

It is said that the journey of a thousand miles begins with one step. So today focus on taking just a single step. Pull out your paycheck for last month write down your net pay. Then open your bank statement and determine what your expenses were for last month. Once you’ve done that you’ll know your personal gap. Write it down… on the back of a paper napkin or in Excel, it doesn’t matter. Next month do the same thing and compare the two. And between now and then focus on increasing the gap (or decreasing it if your gap is currently negative).

This is not just an exercise for a financial newbie. Even seasoned investors can benefit from this analysis. (Re)focusing on the fundamentals is the true secret to financial freedom and there is nothing more fundamental to finance than minding the gap.

It has always fascinated me how cultural differences impact the way that we view finances. Take Japan for example, where in 2005 the average Japanese household savings rate was 25.5%. The average Amercian household savings rate was -0.5% in the same year. That’s negative 0.5% as in we borrowed or dipped into savings to spend 0.5% more than we made that year on average. In that same year, the two most expensive cities to live in were Tokyo and Osaka so it is difficult to attribute this radical difference to the cost of living.

Part of this difference appears to be the result of a tax structure which encourages long term savings, but that alone seems insufficient to explain the vast discrepancy. Most Americans (myself included) have only a limited understanding of the tax code and on average we do a poor job of fully taking advantage of advantageous tax vehicles such as 401Ks and IRAs.

While I’m not there yet, my goal is to match the Japanese model in 2009 by putting > 25% of my income into retirement savings. This is a pretty substantial increase in my overall savings and in 2008 I plan to split the difference between my 2007 savings percentage and my 2009 goal.

In honor of (and hopefully with no offense to) Martin Luther King Day, here is my financial dream:

I have a dream that one day we will all live within our financial means. That we will make sound financial decisions and throw off the shackles of consumerism. As Americans we are guaranteed the opportunity to exercise certain unalienable responsibilities; life, liberty and the pursuit of happiness. The Constitution declares these to be rights and while I generally am willing to provide a large deference to the wisdom of the founding fathers here I believe they were mistaken. These are not rights, they are responsibilities. Now that I’ve offended the strict constructionists, let’s see what I can do for the fundamentalists: Good things do not come to those who wait, they come to those who work for it.

The pursuit of happiness and financial freedom are not opportunities handed to the overwhelming majority of us. They are states we have to work and fight for. That’s not a particularly popular sentiment in the consumerist society in which we find ourselves today, but that doesn’t mean it isn’t true. Financial liberty isn’t found in a lottery ticket for the average American, it is found in a lifetime of planning and sacrifice. Sacrifice of short term gains, for long term ones. Sacrificing dinner out tonight for round the world cruise later.

As you enjoy this national holiday, I hope you’ll reflect on your dreams for you and your family.

Welcome to 60 Second Finance, a personal finance blog. As I mentioned on the about page, this website is my attempt to teach others some of the lessons I have learned about personal financial management. It’s also an excuse for me to learn new things and stretch my understanding. In my day job I am privileged to be a Microsoft Exchange MVP. MVPs are considered to be experts in their field, and my expertise comes primarily from having the opportunity to help others diagnose and resolve their issues. My hope is that in helping others, I’ll become a “Financial MVP” as well.

There were many reasons that I wanted to start this website. The biggest is that my son is a junior in high school and soon he’ll need to start making financial decisions in his life. We’ve been talking quite a bit about what good financial choices look like[1] and how smart choices today can have huge payoffs in the future.

Another reason is that I have been inspired by some excellent writing by personal finance bloggers and I wanted to contribute my thoughts in hopes that others might find them to be helpful. I encourage you to check out the writings of other financial bloggers as well. Here are a couple of my favorites:

Ramit Sethi’s I Will Teach You to Be Rich
J.D.’s Get Rich Slowly

I hope you find this site useful and entertaining.

Chris

[1] Well, to be perfectly honest I’ve been talking a lot and he’s mostly been pretending to listen… he is a teenager after all