Basic Financial Literacy – Part 6

To spend today or spend tomorrow that is the question?

I’ve created the formulas below to help in considering the question.

For any given period of time like a month or year:
1) Available to consume (ATC) = Income – taxes
If I spend less than ATC I add to savings (spend tomorrow)
If I spend more than ATC I reduce savings or increase debt (spend today)

For any given period of time like a month or year:
2)Consumption = Total spent – savings – debt payments – taxes

What is the maximum amount that may be consumed:
3)Maximum consumption = Income – tax + total savings + total borrowings available

So what besides quantity, having a lot, a little or in between motivates our consumption choices?

Consider the following short list.
– Family
– Friends
– Status
– Peer pressure
-The movies
-The internet
-Books, newspapers and magazines
-Formal education

Billions of dollars are spent annually, employing the best and brightest, the beautiful and the talented to get you to spend your money. Each day we’re bombarded with thousands and thousands of media impressions that have this one goal and one goal only. The messaging tells us how we should look, what we should be wearing, where we should be vacationing, what we should be eating and driving. On and on it goes.

So much so that our curve has been turned upside down.

What’s interesting is that it wasn’t always the case. In the early 1900s the average American saved 15%. Just a few years ago that was close to 0. Now as we climb out of the recession it’s about 5%.

The Chinese, for an additional frame of reference, have a current savings rate close to 50%. The Wilson Quarterly ran a great series about this back in 2009 and I want to recommend you read at least two of those articles, ‘Saving Yourself’ and ‘What makes Mr. Zhang Save.’

What do you think?

About jaysanderscpa

Jay Sanders, CPA/PFS, CFP® "There's lots and lots of Numbers in business and your personal life but only some are relevant. The key is to know which one's matter, worry about them and forget the rest."
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