Your personal earnings, expenditures, and savings are the most important determinants of your family’s long-term financial wealth
Summary: How much you earn, spend, and save are by far the most dominant determinants of your long-term financial well-being. Self-control in your decision-making regarding consumption is far more important than clever investing. Expenditure control works, while attempts to be clever about investing usually are counter-productive.
You always should consume currently at rates that are sustainable across your lifecycle.
During their lives, the vast majority of people must convert their human capital into investment assets through their savings, before their ability to earn slips away with increasing age or disability.
Short of receiving a substantial inheritance, marrying very “well,” or having unusually good luck in the lottery, all you have to rely upon in life is your personal human capital or your ability to earn and save. There are no other shortcuts. You probably already know whether inheritance or marriage could relieve you of the burden of working and saving. As a wealth planning strategy, lotteries are highly improbable. Regrettably, lotteries and casinos tend to attract many people of limited means with poor math skills.
You should focus the great majority of your financial planning efforts on enhance personal earnings, manage expenditures, and increase savings. To understand your family’s ongoing financial situation, you should measure all your income and all your expenses at least annually and, preferably, quarterly or monthly.
Valuable investments that many people will never have can slip through their fingers at the checkout stand every day. Simply put, most people should save much more than they do now. The ability to distinguish between needs and wants and to evaluate and control current expenditures will determine financial success in life for the vast majority of people.
Recently in the United States, however, the national personal savings rate has turned negative. The Bureau of Economic Analysis of the U.S. Department of Commerce has tracked the national personal savings rate since 1952, as part of its “National Income and Product Accounts” and “Flow of Funds” reporting. From the 1950s through the 1980s the national savings rates fluctuated around the 9% to 10% range. In the early 1980s, these rates began to decline. In 2006 and 2007, they have turned slightly negative.
This decline in the personal savings rate is ominous. On average as a nation, we are no longer personal savers. While many [...]