How you spend money has a significant effect on what you can accumulate. It is not always about profligate spending either. It has to do with sequence.
Do you spend some money and save some money when you receive income? If “yes,” you draw your living from your income.
Some people link their spending to their money in another way. They put all their money in a bank account and then spend from there. There is no obvious way for them to limit spending before the bank account runs dry. Living out of a bank account is dangerous.
The key to financial success is not merely investing well, it is accumulating capital well. Spending the money without limits that relate to how quickly the money replenishes impairs long term capital formation. It is very hard to catch up later because spending becomes undisciplined and that is a hard habit to overcome.
There is a simple way to look at it that does not involve comprehensive budgets. Ask yourself, “Do I spend based on what is in the bank, or do I spend based on what I am earning?”
A more virulent condition is to spend before it is earned and before it is in the bank account. Lines of credit and credit cards are problematic for long term success. Debt today imposes stringent limits on spending tomorrow. Eventually the payments will take up a big share of income.
Financial success ultimately relies on spending less than you earn. Bank balances and unused credit can lead you far astray.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.