Monday, August 30, 2010

Should I buy that nice little dress/gadget ?

You may think the $1 spent is the same $1 earned. Its really NOT ! One of the fundamental flaws human cannot control their own spending habits is because they DO NOT UNDERSTAND the value of money at the first place. The $1 spent could be equivalent to as much as $7-$10 earning !!

For example if you earn $4,000 a month and you manage to save $400 every month. By year end you would have saved aside $4,800. This money is intended to be put aside earning interest as part of the MeM (Money earns Money) mechanism. So its not just $4,800. It will be more than that as time goes. The longer it is kept there the more powerful compounding factor is working for you.

Says you take out $1,000 from this saving at year end for an unplanned luxury expense. Its not just $1,000 you have used. You have actually dug a hole in your saving - a 21% hole. If you saving return is 3%, it will take more than 7 years for this hole to be refilled back to its original amount. So you have practically used up your future 7 years on this saving for this unplanned expense.

On the other hand, if it took you 2.5 months to save that $1,000; Out of your equivalent earning of $10,000. For every $1 you use from your saving, you will have to earn $10 to get that $1 back. So when you use that $1,000 its not just $1,000 you have to replace but actually a $10,000 worth of your earning.

Does this particular unplanned luxury expense really worth your future 7 years and/or your $10,000 earning power ?

They money you get in ( earn ) does not necessary carry the same meaning to you as the ones you get out ( use ). Especially when there are so many deductions and taxes in this modern world.

It is best to put aside another $100 saving every month for 'unplanned luxury expense' category. That way if you really have to use it, you will still have $200 left ( after a year of saving ). More if somehow you are able to put that aside and go for a better future good.

If you have no such ability for this new saving category, try to increase your income or else settle with NOT use beyond your means.

At the end, this is the ONLY concept that determine if a person is an investor or a consumer all his life. Everyone want to buy Porsche and LV bags, some did it diligently, some others cost in their lives.