Personal Economics (or How to Budget)

It seems that many people do not understand a very simple principle and it makes them VERY unhappy. It can screw up their life so please continue reading to help you be happy! (or too simplistic so skip!) 

For an individual for a period of time: 

Income (I) minus Expenses (E)  = Savings (S)

 or

 I – E = S

Because one has Income and Expenses for a specific time this relationship is period dependent. A month is a good baseline to consider as rent or housing costs are often monthly. Rent is only part of expenses. One must eat so food costs over the period must be considered.

 E = sum of all costs for the period (rent, food, utility bills, transportation, credit card payments, taxes, gambling losses, etc.)

 I = some of all inflow of cash for the period (wages/salary, investment income like interest, dividends, or the collection of rents for property owned, money your Granny gave you, government payments, gambling wins, etc.)

 S= the left-over income if you spend less than you make i.e. I – E. If Expenses are larger than Income then S is negative and you are in debt.

 All of these are period dependent. We used a month, but there is a longer-term effect. 

If I -E = positive S one can use the S in another period, and it is part of I. If it persists positive your savings will grow. If it persists negatively your debt will grow.

What this means is that whatever income an individual has will constrain what he/she spends. Sure, one can spend way more than Income but debt will rise and those who hold your debt will want to get paid back. You can have your stuff taken away via seizure or if you borrowed from the Mob you can have your kneecaps broken.

What can you do?

Control I This usually takes time. Get a higher paying job (this may include training like education that is a cost for a period of time). Get a second job. Have savings from previous periods that pay interest, dividends, etc.

Control E This can usually be done more quickly. The Expenses one has are a) fixed (like rent, utilities, etc.) and b) discretionary (your choices substitute - like buy groceries and cooking at home instead of eating at a restaurant, making coffee at home versus at a café, buy lower priced stuff, etc.)

This concept is called BUDGETING. It is the matching of Income to Expenses. Even fixed Expenses can be lessened through substituting. Rent can be lessened by moving, taking in another person to help pay expenses (a roomie).

There is a reason this came after Patience, Basic Economics, Survival, and other posts. Most of these posts relate to each other. Please consider that. 

As previously stated, Millionaires are people who live within their means, budget, and spend wisely, and focus on financial independence first. These are habits that take discipline, but ones we can all adopt to begin growing wealth or at least lessen debt.

Wealth is not evil in itself, it is simply the accumulation of residual income over time .

A case study: 

Ronald James Read (October 23, 1921 – June 2, 2014) was an American philanthropist, investor, janitor, and gas station attendant. Read grew up in Dummerston, Vermont, in an impoverished farming household. He walked or hitchhiked 4 mi (6.4 km) daily to his high school and was the first high school graduate in his family. He enlisted in the United States Army during World War II, serving in Italy as a military policeman. Upon an honorable discharge from the military in 1945, Read returned to Brattleboro, Vermont, where he worked as a gas station attendant and mechanic for about 25 years. Read retired for one year and then took a part-time janitor job at J. C. Penney where he worked for 17 years until 1997.

Read died in 2014. He received media coverage in numerous newspapers and magazines after bequeathing US$1.2 million to Brooks Memorial Library and $4.8 million to Brattleboro Memorial Hospital. Read amassed a fortune of almost $8 million by investing in dividend-producing stocks, avoiding the stocks of companies he did not understand such as technology companies, living frugally, and being a buy and hold investor in a diversified portfolio of stocks with a heavy concentration in blue chip companies.

https://en.wikipedia.org/wiki/Ronald_Read_(philanthropist)

The point of this blog is to help the reader think critically and rationally. That suggests using the reader's intelligence to make them more aware of what is and change the reader's behavior and hopefully have a more fulfilling life. Not wanting too much too soon; having Patience is implicitly part of the formula.

Be happy with what you have. Remember Maslow's hierarchy of needs, if you have shelter, food, health, and security you have the basics – you have enough stuff. Work on the higher needs. Then you will have enough. Wealth is what you make of it. If it is never enough, then you are likely on the wrong path.

This is strictly my opinion, but it seems to me there are thresholds of economic well being

Survival: going day to day ($0 or negative wealth)

Advanced Survival: Going paycheck to paycheck (this can be moved to the next level with some planning like reducing expenses, improving income). ($500 or negative wealth)

Moderate wealth: Having enough to cover unexpected expenses from Saving (this can more easily be moved to the next level with some planning like reducing expenses, improving income). (Enough to cover 3 months expenses with a stoppage of wage income, Likely $30,000+) 

Secure wealth: Enough Savings and Income to offset expense for a lifetime. (Income is likely to be from renewable (passive) sources like rents, dividends interest, pensions... likely wealth exceeds $1,000,000). 

Moderate wealth: Beyond secure. Can purchase luxury goods in moderation. Some political/social influence beyond voting through activism/donations. (Likely wealth exceeds $5,000,000). 

Great wealth: Likely to have well more than what one could purchase in a lifetime. Individual can buy luxury goods beyond normal like private aircraft, yachts, private islands, can influence politics/social outcomes through activism/donations. (Likely wealth exceeds $100,000,000). 

Massive wealth: Almost unlimited possibilities. Could buy entire corporations, has political/social influence at high levels. (Likely wealth exceeds $1,000,000,000). 

The amounts are in US Dollars at 2022 values.

At each threshold one must ask is this enough? The temptation is to play at a whole different level, if successful. If not successful, one could drop one or more levels.

The means to how this wealth was acquired is also important. Ronald James Read achieved moderate wealth by his own actions. He knew how he got there and continued the pattern. Those who inherit or win great wealth are less secure, with greater likelihood of loss.

Life after winning the lottery may not stay glamorous forever. Whether they win $500 million or $1 million, about 70 percent of lotto winners lose or spend all that money in five years or less.

https://www.rd.com/list/13-things-lottery-winners/

What is achieved with ease is held with difficulty. What is achieved with difficulty is held with ease. (Machiavelli) 

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 https://cypressinsuranceteam.com/budgeting-security/

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