So while researching another post (yes I do actually do research on occasion (feel free to mock me in the comments section)) and came across a wonderful pair of sentences in The Atlantic that has awesome clarity for me in terms of personal finances.
With savings we pass today’s earnings to the future.
With credit, we pull expected future earnings into today. -Derek Thompson
I read those sentences and had to put the print out down I was so dumb-founded by the clarity of it all.
Yes, it is a simple statement, and it is blindingly obvious once you read it, but the awesome clarity of it I just love.
The article it appears in was actually the topic I was going to write about, but 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 do a public speaking engagement on money I think this would be the opening statement or slide for me, it is a perfect explanation of what many people do not understand about saving and credit, and in many cases some people over complicate the concepts as well, but 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 really do like it when something I read resonates with me.