WHY SPEND LESS THAN YOU EARN
You probably have heard the statements “spend less than you earn” or “live below your means” from various sources. While they may sound obvious, many people struggle to apply the principle in their finances. Yet, all other money management principles are effective only if you set aside some of your income to take care of future needs.
You may ask, why not rely on future income to take care of future needs?
Foremost, because life happens in phases. For purposes of this article, there are three phases:
- Developmental Phase: The first two decades of life during which a young person grows, develops, and acquires various skills. They are typically financially dependent on their parents or guardians.
- Economically Productive Phase: This is the age period from the 20’s to the 60’s for majority of people when they are actively engaged in economic activities and are financially independent.
- Retirement Phase: In this phase, one’s ability to earn a living from daily activities is diminished due to aging. One may be financially independent or dependent on others depending on how they managed their financial resources in the previous stage. For many, this period may last longer than their developmental stage.
In addition, life is unpredictable. A great deal of life happens during the second phase, both planned and unplanned in the form of goals and transitions. You set your goals in relation to where to live, starting a family, buying a car, a home, starting a business. Meanwhile, transitions may happen that you never planned for such as a disability that affects your ability to generate an income, death in the family, divorce, loss of a job or business. Further along, you may find yourself sandwiched between two generations, caring for your children and your aging parents, or your children’s marriage may be in trouble and they return home sometimes with grandchildren.
Except for a few transitions such as selling a business or receiving an inheritance that increase financial resources, most transitions’ timing and financial impact cannot be predicted and when they happen, you need financial resources. Mitch Anthony, the author of the book ‘Retirementality’, puts it clearly; you either ‘prepare or repair’. In addition, as John Maxwell says, ‘it’s better to prepare than to repair’. To build sound financial capital demands you regularly set aside some financial resources from your income by spending less than you earn. This will ensure you are not caught flat-footed, always putting out fires; rather you will be ready to navigate through life’s transitions calmly conserving your energies and channeling them towards building social and spiritual capital allowing you to lead a balanced life.
Scriptures clearly demonstrates this principle as per sample of verses below:
- Genesis 8:22 (NLT) As long as the earth remains, there will be planting and harvest, cold and heat, summer and winter, day and night.”
- Proverbs 21:20 (NIV) The wise store up choice food and olive oil, but fools gulp theirs down.
- Genesis 41:33-35 (ESV) And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it. 36 That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.”
- Proverbs 30:24-25 (ESV) Four things on earth are small, but they are exceedingly wise: the ants are a people not strong, yet they provide their food in the summer;
- 1 Corinthians 16:2 (NIV) On the first day of every week, each one of you should set aside a sum of money in keeping with your income, saving it up, so that when I come no collections will have to be made.
In our next article, we will explore how much to save from your regular income and where to put the savings.