When you read about personal finance, it’s interesting how you are presented with two (apparently opposite) options for your money: Save or Spend.
Depending on what you’re reading, these two categories might be described differently. Maybe save= responsible, while spend= reckless. Or perhaps save= boring, while spend= FUN! But are the concepts really mutually exclusive? I prefer to ask: Some money now or more money later?
In economics (please keep reading and don’t fall asleep when you see that word- I promised to make personal finance fun remember!), the financial formula is:
DY= C + S where
DY= Disposable Income (after-tax earnings)
C= Consumption (also known as spending)
Ok…. so spending and saving ARE opposite? The formula says so, right?
No! If you look at it that way, you’re not following the math to the end. Formulas can be rearranged, right?
If you really think about it, what are you going to do with those savings one day? That’s right, you’re probably going to spend it!
Ultimately, the two concepts are the same. But if you have a little patience:
When DY= S it ultimately equals more C.
So, would you rather have some money now or more money later?
If you earn a dollar and spend it (consumption) right away, it’s gone forever. Sure, you now own whatever that dollar got you. But that money will never be seen again. You just killed it’s potential.
DY ($1)= C ($1)
But what if you instead saved that dollar? If you send your little dollar bill army out to grow?
If today you make DY ($1) = S for 25 years*, you will end up with $5.43!
With a little time (and no effort), DY ($1) can instead = C ($5.43), simply by waiting in the S section for a little while.
Now imagine if your dollar bill army was made of thousands? There could be SO much spending one day.
Are you smarter than a 4 year old?
There’s an infamous study called the “Stanford Test”. Researchers took a group of 4-6 year olds at a nursery school and separated them into rooms without distractions (it was the 70s; you could pretty well get away with anything).
They then gave each kid a treat (an oreo, marshmallow, or pretzel). The kids were given permission to eat it if they wanted, but were told if they waited 15 minutes they would get a second treat. They wanted to study if kids could manage delayed gratification. The kids that waited were later shown to have better life outcomes in almost every measure (grades, BMI, etc).
Now I’ll admit as a kid I would have eaten that dang treat! Then likely cried when the researchers wouldn’t give me more.
Look at me in my buggy; clearly I ate EVERYTHING.
However, I grew up and got smarter (30 years should do that). I realized if I could delay gratification now, I could have more later.
This isn’t about sacrifice; I fully intend on spending my money later in life. But by then, my dollar bill army will have worked for me and hopefully at least quadrupled in size.
Want to spend more eventually? Make sure you DY= S today for more C later.
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*Assuming 7% rate of return with this calculator