The Spend-Less-Than-You-Earn Formula
The three-part formula that guarantees wealth: earn, save the surplus, avoid debt
The Spend-Less-Than-You-Earn Formula is the foundational equation of Collins' entire financial philosophy, stated simply as: spend less than you earn, invest the surplus, avoid debt. He calls this the simplest and most powerful formula for building wealth, and argues that following just this single principle will make you rich, not just in money but in freedom and life options.
Collins and his wife maintained an unwavering 50% savings rate throughout their working careers. This high savings rate has a dual power: it simultaneously builds your investment capital faster while training you to live on less. The beauty is that the less you need, the less you need to accumulate before you are financially independent. A person who saves 50% of their income needs far less total wealth to retire than someone who saves 10%, because their annual expenses are dramatically lower.
The formula explicitly rejects the cultural normalization of lifestyle inflation, where raises and bonuses are immediately consumed by upgraded housing, newer cars, and more expensive habits. Collins describes people whose lifestyle matches or exceeds their income as 'gilded slaves,' outwardly prosperous but financially imprisoned. He contrasts this with the monk from his opening parable, who by learning to live on rice and beans freed himself from the need to cater to anyone.
- Spend less than you earn, invest the surplus, avoid debt: this is the complete formula
- A 50% savings rate is the gold standard for reaching financial independence
- A high savings rate has dual power: more to invest and less you need to live on
- If your lifestyle matches or exceeds your income, you are a gilded slave
- Being independently wealthy is as much about limiting needs as having money
- Nothing money can buy is more important than your financial independence
- You own the things you own, and they in turn own you
- Track every dollar for one monthBefore you can spend less, you must know where your money goes. Track every expenditure for 30 days. Most people are stunned to discover how much leaks away on things they do not consciously choose or value.
- Identify the gap between needs and wantsSeparate your spending into genuine needs (housing, basic food, transportation, insurance) and wants (dining out, entertainment, upgrades, subscriptions). The wants category is where you will find your surplus. Collins warns against the powerful marketing forces that blur the line between needs and wants.
- Set a target savings rate and automate itStart with whatever savings rate you can manage and work toward 50%. Automate transfers to investment accounts on payday, before you have the chance to spend. Treat savings like a non-negotiable bill. Increase the rate every time you get a raise.
- Invest the surplus in VTSAXEvery dollar saved beyond your emergency fund and living expenses flows into VTSAX or equivalent index funds. The formula is complete: earn, spend less, invest the difference, avoid debt. Time and compounding do the rest.
Throughout 34 years of marriage, including periods when both Collins and his wife were unemployed, they maintained a 50% savings rate while working. They never had a car payment. During a three-year period when neither was working, their net worth actually grew because their investments were compounding faster than their spending.
Collins was a natural saver from childhood. He started working at 13 and found watching his money grow intoxicating. When his father's health failed and the family business collapsed before Collins turned 16, his savings went to pay for college. This early lesson that the world is fiscally insecure cemented his commitment to always spending less than he earned. Over 34 years of marriage, Collins and his wife maintained a 50% savings rate, never had a car payment, and avoided debt entirely. These three habits, combined with eventually embracing index fund investing, made them financially independent despite numerous investing mistakes along the way.