I was researching another post. Yes, I research on occasion (feel free to mock me in the comments section). During this process, I found a wonderful pair of sentences in The Atlantic. They provide awesome clarity for me regarding personal finances.
With savings we pass today’s earnings to the future.
With credit, we pull expected future earnings into today. -Derek Thompson
When I read those sentences, I had to put the printout down. I was dumbfounded by the clarity of it all.
Yes, it is a simple statement. It becomes blindingly obvious once you read it. I just love the awesome clarity of it.
The article it appears in was actually the topic I was going to write about. However, that is for another day. This simple lightning bolt statement must be the first paragraph of any personal finance FAQ or rules to live by.
If I ever speak publicly about money, this would be my opening statement or slide. It perfectly explains what many people do not understand about saving and credit. In many cases, some people complicate the concepts. However, this one simple statement sums it all up very nicely.
The two sentences bring up two very important points to consider:
- What is the Future Value of the money you are sending into the future? It all depends is the simple answer, but remember if you put your savings in something risky, you may not be passing this money into the future (it might just disappear with time).
- What is your Future Earnings that you are spending right now? In my case I am actually making less than I did 10 years ago (gross), so are you sure you are going to be making more in your future, because you are using that to pay for the stuff you are buying right now.
I do like it when something I read resonates with me.
I do my utmost to stay out of debt, and it hinges on your point #2. I am also making less money now than I did a few years ago. I am glad I do not have any debt to be paid with my now lower income.
The future power of money is amazing.
In my case I have just thrown about $700 towards the first of 3 courses that will possibly help me earn an income. If that money can help me get a job then it is money well spent, but if not it is still money well spent as I improved my knowledge and might be able to use that knowledge in another way later.
I am 51 with practically nothing set away for retirement, and taking this money away from my retirement hurts, but the possibility that it improves my income is important too…
It hurts but I have to do it…