Years ago when I first began doing cash flow analysis and planning with my clients I observed that we have a tendency to increase our outflows as our income increases. During the first annual review with one particular client the conversation went something like this:
Me: It looks like your spending equals your income. You’re not spending more than you have, but you are not presently saving any money, and therefore financial independence is unlikely.
My Client: I know, but I should be getting substantial income increases over the next several years, so I’ll be able to start saving some money pretty soon.
Then during our second annual review the conversation went something like this:
Me: You were correct, you did make quite a bit more money this past year. However, it seems that your expenses have increased as well. You’re not yet able to save any money.
My Client: It’s true. It seems we have been spending a bit more lately.
Our third annual review:
Me: Another nice increase in your income last year, congratulations! Still no savings though.
My Client: Check out my new Corvette!
Noticing a trend? This is not a fictitious story, and this client is not a bad person, but he did miss some opportunities to save and invest toward his goal of financial independence.
The balance between current consumption and investment for future consumption is critical for most of us. In my view it would be just as foolish to not spend some of our earnings presently as it would be to not save some of our earnings. The saving part is the challenge. I have told my kids on many occasions, the only opportunity that we have to save money is before we spend it. After our money is spent the opportunity to save it is gone. Obvious, but important to remember during the heat of battle.
One financial planner friend of mine tells his clients to “save early and often.” Pretty good advice. In a future posting I will illustrate the significant difference in accumulated wealth when one saves and invests early instead of later. For the present I will just state that early is better. And, I will include a link here to a piece that I came across that does include some interesting numbers related to this topic. I think it is well worth the reading time, so please take a moment and click the link below:
PS. You, dear reader may have noticed that I have published three entries within the past week. I’m not trying to inundate you with “words from Carl”, but my desire is to present information whenever I think it would be beneficial to my readers. In this particular case the referenced piece on personal lifestyle bubble motivated me to share some information that I consider to be useful. I hope that you consider it to be useful as well. And if you think that a friend of yours (or perhaps your child or grandchild) would benefit from reading my words and references please put them in touch.