Some people use credit to spend their money before they have earned it. Other people spend money as they earn it. However, if one wants to get wealthy, one needs to re-earn the money.
First order re-earnings work like this. Pick an interest rate, let’s say 4%. Once $100 is earned, it is deposited in a savings account where it earns interest. This results in $4 re-earned over the year. These are the $4 that can be spent. It may not sound like a lot, but that is a matter of perspective. Why next year there is another $4 to be had from the same $100. If expenses are limited by what can be re-earned wealth obtains.
The first thing I started spending re-earned money on was my book addiction. I got most of my books used and I get maybe one major text book a month and a paperback or two. On average. This costs me about $200 a year. To afford this I need to save $5000 and I got my reading taken care off. In other words, I don’t think of the $5000 as $5000 to spend but something I have to pay to get $200 each year in perpetuity.
However, perpetuities do not create more wealth. If more wealth is desired one must look at re-re-earnings or second order earnings. Save $10000. This gives $400 in re-earnings. $400 results in $16 in re-re-earning. Spend the $16 and use the $400 to build a new base.
As with most personal finance math, this is trivial. The difficulty lies in changing one’s view to reflect this philosophy. If I give you $1,000 do you see $1,000 to spend or do you see $40 in perpetuity?
Originally posted 2008-02-23 07:29:01.