The Geometry of Spending
Spending is
defined as, ‘to give (money) to pay for goods & services, or so as to
benefit someone or something’
There are three ways in which we primarily
spend our money – On
Ourselves, On Others & On Govt
On ourselves, for meeting all our basic needs, comforts and
luxuries – We can have complete
control over this. What to spend on & what not to spend on, is a complete
choice which we possess.
On Others, for meeting societal obligations, charity etc. -
We can have complete control
over this, too. What to spend on & what not to spend on, is a complete
choice which we possess.
On Govt., for paying the
mandatory taxes (You Earn, You Pay) – We will have no
control on any tax rates
applicable. It is a subject matter which is well within the closed
domain of the govt / ruler.
Yes, there is an argument that we can ‘manage
taxes’. We can, but still, we do not
control the applicable tax rates, either directly
or indirectly. At best, we can try tax efficiency, but still, the rates are not
controlled.
The concept of spending beyond these three vertices of a triangle, is probably alien.
Whenever there is a cash outflow from us,
it has to fall into the spectrum of any
of these categories, or a mix of them.
The problem is not with Spending itself, but
the way in which we keep going about it.
Of the three corners, we
can surely & sincerely control two of them, but alas, for most, it is beyond their actions.
Control the two vertices of the triangle base, and the
third one doesn’t pinch
much.
Well, exceptions set aside on the third
vertex.
Albert Einstein once said, Compound Interest is the eighth wonder of the world. Well, that is what is attributed to him.
Did he indeed ever say this statement?
I don't think for the reason; his IQ was far higher & would have probably made a statement like, "Compound Interest is the only wonder, on Investments"
I've enclosed the compound interest formula which details each variable.
While, all the 3 variables make a reasonable impact on the end result A (target amount); the most important variable which is under our control to a large extent but also, the least ignored is t (time)
We tend to focus primarily on r (rate of return), which is by all means way beyond our control; always and ever. Yes, the rate of return can be known in advance (when investing into fixed income deposit) but, can it be controlled? NO
So, why do we never speak of 15 / 20 / 25 / 30 / 40 / 50 years of investing time frames?
GREED; to make more money at the shorter end of the time frame & FEAR; yes, fear of unknown at the longer holding periods.
The unfortunate truth is - 'we are quite good at compounding GREED at the shorter end & compounding FEAR at the longer end of time frames, but never ever understand the impactful COMPOUNDING RATE OF RETURN at the long end
"GREED for shorter time frame & FEAR for longer time frames - dispense off with them, if COMPOUND INTEREST has to work in your favour"
FOCUS, where we need to FOCUS - the "t"
Note: Well, P the principal amount is also under our control, except when people get to play smart by leveraging. In which scenario, P is actually not "Our P"; it becomes a dangerous B (borrowing)
