In England, train passengers are used to seeing “Mind the Gap” as a warning to watch out for the space between the train door and the station platform. If you don’t pay attention to the gap, you can fall into the gap.
The world of personal finance has its own gap. I am referring to the gap between your income and your expenses. How you manage your gap is directly related to the time it will take you to achieve your financial goals. This is the money you have left after expenses to invest, save, and spend. It’s up to you to decide where this money goes.
Consider your goals and current financial picture to determine where your gap money goes. It can go towards building your emergency fund, investing, extra debt payments, or sinking funds, to name a few.
“It is not how much you make, it’s how much you keep”
Robert Kiyosaki
The Gap is the Real MVP
Here’s an example of the power of the gap. Lisa and Dulce are both 30 years old, with the same take-home pay of 5K per month. Lisa’s total expenses are 4K and Dulce’s total expenses are 3.5K.
In the example, both women will have a good amount of money in retirement. But you can see the impact that their gap size had on their final retirement numbers. Ultimately, the higher your gap, the faster you’ll reach financial independence.
It’s Your Turn
Like the England train passengers, you need to mind your financial gap. Have a plan for your gap money because you can easily spend it on things that are not aligned with your goals.
Look at your numbers, calculate your gap, and do the following:
- Break down how much of your gap you will allocate towards investing, saving, and spending each month. Add those numbers to your monthly spending plan.
- Ask yourself if your numbers are aligned with your goals.
- Investing: Use the Compound Interest Calculator from investor.gov and enter the amount you’re investing on a monthly basis towards retirement to calculate how much money you’ll have by the year you want to retire. You can use a 10% compound interest – the average stock market return.
- Is this the amount of money you want to have in retirement? If it is, great! If it’s less, increase the gap! If you want to retire earlier, increase the gap! My point is that you get to pick the pace that works for you.
- Saving: Whether you’re saving for an emergency fund, sinking fund, or long-term goal, divide the amount of money you need by the number of months you have to save. Are you saving enough or too much? If it’s not enough, can you push the date, reallocate money from another category or increase your gap? If it’s too much, you can reach your savings goal quicker or you can reallocate the extra money towards another category.
- Spending: Is this number realistic for your lifestyle? Whether this money goes towards eating out, personal care, or shopping, make sure it is realistic. There is no point in under-budgeting if you typically spend more in this category. Your budget needs to have your real numbers for you to be able to stick to it. I’ve been there where I acted like I was only going to spend $100 eating out when I knew good and well that money was going to be gone halfway through the month.
Increase Your Gap
After all this talk about increasing the gap, you may be asking yourself, “how am I supposed to increase my gap?”
It comes down to two things:
1. Reduce your expenses
- Try reducing your larger expenses to make a bigger dent. Shopping around for better deals on car insurance is a good place to start.
- Cancel subscriptions and memberships you no longer use
- Call your cable/internet company to negotiate your bill
- You’ll notice that there’s only so much you can cut and at that point, you need to focus on increasing your income
2. Increase Your Income
- Negotiate a salary raise
- Find a better paying job
- If your employer provides a 401K match, be sure to invest at least up to the match. It’s free money that will get you closer to your retirement number.
- Side hustle
- Sell items you no longer use
Now that you know what to do, go for it! Like now, I mean right now…Go!
