At the highest level, you really only have three options for using your money : Give, save, or spend.
Each rupee you allocate to one category means less for the other two. It’s a zero-sum game.
All three uses are worthwhile in their own context. In this post, we’re going to go over all three uses of money and talk about how to best fit them into your life.
Jesus once said that it is more blessed to give than to receive.
Generosity is one of the best opportunities you have to grow as a person.
When you work you are making a contribution to society. The pay you receive is society’s valuation of your contribution. Giving away your hard-earned money is a decision to contribute more than you consume. You aren’t freeloading, you aren’t even balancing the give and take. You’re accepting an imbalance: You give more than you take.
There’s also the fact that giving is extremely satisfying.
Do good, feel good, repeat.
Giving is one of those things that everyone knows they should be doing, but not enough people actually do it.
It’s so easy to push giving off into the elusive concept of “someday.” You’ll start giving once your debt is paid off. Or when you get your next raise. Or when the tax return comes in. Don’t do this.
The way to give is to give something now. It might not seem like an impressive amount. It doesn’t matter. This is about doing good, not stroking your ego. Plus you can always increase it later.
You can create a giving list. Simply list out people and causes that you want to give to.
As money comes into your life, increase your standard of giving before you increase your standard of living.
Find organizations you love and that you would want to make regular contributions to and automate it.
Saving is basically anything that you don’t spend or give. This is the category of what’s left over. It’s what you get to keep.
So the question of saving really comes down to what you should do with your savings. You can typically divide savings up into three categories:
Saving for spending
The emergency fund
The point of investing is to put your money to work for you.
Without investing, your income potential depends on your ability to work and earn money. When you invest your money into buying assets, your assets make money whether you work or not.
Investing is a long-term endeavor and it takes the flywheel a long time to get moving. But once this gets going, it becomes powerful.
You can eventually reach the point where your money starts making more money than you do.
The only problem is that most investments don’t deliver perfectly predictable returns every year, so just because your money makes more than you do one year doesn’t mean it will gain the next year.
Nevertheless, if you can amass a portfolio that is about 25x your annual expenses, you can reasonably consider that you have acquired enough money to never work again.
The Emergency Fund
Money is really good at providing two things: Freedom and a margin of safety.
Investing is the road to freedom. Save up enough and you can live off your investments. But the emergency fund is the king when it comes to creating a margin of safety.
Cash is a little bit like oxygen. You don’t always think about it, but when it gets low, it’s all you can think about.
This is money that you set aside just in case you need it. And you never know when you’ll need it. Life can be wild and unpredictable, but cash can cover a lot of things that could go wrong.
Spending is a bit of an odd category. On the one hand, the core of personal finance is to spend less than you earn. This implies that one of two ways to get ahead is to limit or reduce your spending.
On the other hand, there’s no getting around that fact that you need to spend money. And chances are, you want to spend more of it.
Just increasing your spending doesn’t guarantee that you’ll make life better for yourself.
Money doesn’t automatically buy happiness, but it can be used to enhance your well-being if you use it wisely.
Here are some of the ways that it can make sense to spend your money to improve your life:
Buying back your time
Creating connections with others
Here are a couple of ways of spending money that are likely a dead-end :
Status symbols (i.e. buying things to impress people)
Wishful fantasies (e.g. maybe if I buy some nicer cookware I would entertain more…)
Setting Your Allocations
This is where the “personal” side of personal finance becomes very important. One principle that seems pretty clear is that you shouldn’t completely ignore any one of these three categories.
It’s unwise and mildly arrogant to not save up for a rainy day. It’s selfish and delusional to tell yourself that you’ll start giving “someday.” And of course, it’s nearly impossible to reduce your spending to 0.
Chances are you should be fighting to increase the amount that you give and save, while either reducing your spending or at least keeping the goalposts from shifting.
The tough part comes in knowing when you can shift from saving and to start ramping up your spending and giving. But of the three, saving is the one that you can eventually graduate from.
At some point you will have enough to cover your living expenses. Then you’ll have enough to cover your living expenses and additional luxuries. Then you’ll have enough for all that plus a little (or a lot) extra “just in case.”
The exact amount that you want extra is up to you. But once you have it, you can stop saving and either give more or spend more (or both).
Dividing vs Expanding
The way we’ve been looking at things so far, we’ve treated your money like a big pie that needs to be divided up. It can only be split into three pieces, but at least you get to decide how big each piece is.
But what if you can just make a bigger pie?
Making a bigger pie = earning more income.
If the core premise of personal finance is spend less than you earn and invest the difference, you have two approaches: spend less or earn more.
The more you earn, the more there is to divide up between giving, saving and spending.
This means that it’s actually possible to increase your giving, saving, and spending all at the same time.
The key is to focus on making more money.
In many ways, this is the arena it makes sense to focus on anyway.
Every rupee that you earn (and keep safe from the tax man) has three possible destinies. You can spend it, give it away, or save it. And the money that you save is really just money that you will give and spend later. Upon closer inspection it really just comes down to a difference in timing.
Of the three, spending typically comes the most naturally. You have to engage in some level of spending just to meet your basic needs. Plus there’s a whole army of marketers working to try to get you to spend a whole lot more than that.
When it comes to spending, develop the discipline to pursue the spending that leads to greater satisfaction and well being, and make sure you live within your means.
Fight to be able to give and save, although think about how you will know you have finally saved enough.
(Excerpts taken from an article by Matthew.)