Mind the Gap

The notion of “mind the gap” is to be attentive to the gap between what you earn and what you spend. Oftentimes, people refer to that as savings, but the word savings has this connotation of a reduction in spending. So I call it the gap because I don’t want to use the word savings. I want to emphasize the difference, the delta between what you’re earning and what you’re spending, and there are only two ways to increase that gap. You can either earn more or you can spend less — or you can do a combination of both. But by referring to it as the gap between the two, it opens up your mind to the fact that we’re not talking just about frugality, we’re talking about increasing the size of that gap in whichever way is most effective for you. And that’s going to differ depending on your opportunities, your skill sets, and where you are at this point in your life.

Earn more

So if you are just getting started in your career then, unless you’re very fortunate, you probably aren’t earning a whole lot just yet, and so if you want to increase the gap between what you earn and what you spend, focusing on the earning side of the equation is — for most people at the beginning of their career — probably the effort that’s going to reap the most rewards. Now, depending on what type of career or industry you’re in, you’ve got a couple of choices. You can either focus on making as much money as you can within your given profession, so rapidly climbing that career ladder.

That’s one good option for certain fields out there, but there are other fields, like the one that I was in, where I knew that my upward earning potential was never going to be that great. My starting salary out of college was $21,000 a year, and my ending salary three years later when I quit that job was $31,000 a year. That was the most that I ever earned working for somebody else. And I knew that in my field — I was a print newspaper reporter — I was never going to make a whole lot of money, and so based on the specifics of my career and my industry, I knew that leaving to start my own company, to start my own business — the path of self-employment that eventually led to entrepreneurship — had no upward ceiling in terms of what I could make. And so, even though it was a bigger risk, it had the potential for bigger reward. Now, that’s not going to be the case for everyone, right? Depending on what field you’re in, you might be able to make a lot more money working for a major consulting firm or a big law firm. It completely depends on your field, but that’s the choice that each person early in their career is going to have to make.

And then a third sort of hybrid option is that you might really focus on your career but also have some kind of side hustle or side project that brings in income. And so those are three different paths that you can take, especially early in your career, as you’re figuring out how to focus on the earn more side of the equation.

Spend less

Originally, there was a concept called the big three, and they represent the three biggest expenses that most families or individuals pay. And those, the big three, are housing, transportation, and food. There’s also a related concept called the big four, and it includes healthcare, which, depending on your individual or family situation, may or may not be a large line item for you. If you can lower the costs of the big three, that will have an outsized impact on the amount of money that you can save.

Now, the issue is when people talk about how to save more money, the problem is that most people focus on these tiny expenses that don’t actually move the needle that much. So, for example, walking into a Starbucks and buying a $5 latte — even if you do it every single day, sure, yeah, you can cut back, but it’s not going to move the needle a ton. But if you were to lower your housing costs, for example, by Airbnbing a room in your home, taking in a roommate, or downsizing from a three-bedroom home down into a two-bedroom home, if you were to lower your housing costs, that would have a massive impact on your budget. You could be buying lattes left and right and still come out ahead.

Same thing with transportation costs. If you can get rid of your brand new car and get a reliable used clunker, or if you live in a major city and you stop using Uber and Lyft and start taking public transportation assuming your city has that, that’s going to make a massive difference in your budget. But oftentimes people don’t like to talk about making those kinds of changes because those are difficult changes to make. Selling your home and downsizing from a 2000 square foot home down to a 1200 square foot home, it’s difficult, it’s unpleasant, and it might involve moving multiple family members. It’s a gigantic one-time decision and one-time sacrifice, and so, instead, there is this tendency to overfocus on trying to cut back on these small little items, trying to penny-pinch here and there. That’ll move the needle a little bit, but it’s not going to be a big win.