Wednesday, December 16, 2009

Giving Saving Priority over Spending

In managing our personal finances, we typically have given savings higher priority than spending. Here are our reasons for doing so:
  • Spending before saving can sometimes lead to reducing wealth. From my observations, many people think of finances in the order of earnings, spending and saving.

    Money Earned - Money Spent = Money Saved

    In this scenario, savings is a result after all the money has been spent. An issue arises when the amount of money spent is greater than the amount of money earned, which causing savings to be negative. In addition, the amount saved can vary significantly from month to month and even be negative.

  • Saving before spending can often help increase wealth. We prefer to "pay ourselves first" and thus, think of our finances in the order of earnings, saving and spending.

    Money Earned - Money Saved = Money Available for Spending

    For this scenario, the amount of money saved is defined ahead of time, before the spending has been done. Thus, every month savings grows as a contribution is made regularly. Also, since we pay off credit card balances every month, we only spend the amount of money available.
  • For us, we believe that choosing a saving before spending financial approach created good spending discipline and significantly increased our probability of building wealth.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or saving advice. Please consult a professional advisor.

    Copyright © 2009 Achievement Catalyst, LLC

    1 comment:

    Anonymous said...

    I agree that saving before spending is a good idea. If we do it in reverse, the saving seldomly gets done.