If spending less than you earn is the golden rule of personal finance, then it would logically follow that spending money wisely is incredibly important.
I would define “wise spending” as understanding that money is finite and creatively using it as effectively as possible to yield the most benefit.
I see lots of people using money in creative ways every day to yield benefit, but it seems that very few people seem to understand that it is finite.
According to Websters – “finite” means…
1a: having definite or definable limits b: having a limited nature or existence
2: completely determinable in theory or in fact by counting, measurement, or thought
So, what I get from this is that any given moment every person has a finite amount of money in their possession. If you have $2000 in savings you can buy a $2000 couch – if you would like, but if the couch costs $2200, then you don’t have enough money.
I know you are probably getting some really deep revelation from this 😉 but somehow we understood this better when we were 7 years old than we do now. With the ridiculous abundance of available credit, very few actually think of money as being finite. As all the obvious indicators suggest, this is a problem.
It isn’t just about personal finance
You can surely see the effects of foolish spending in many households across the U.S., but it isn’t limited to our personal finances.
What comes to your mind when I mention “AIG”? If you are like most, you probably think of the debacle recently where they used the bailout money (our taxdollars) to pay bonuses to a lot of their top executives. Personally, I think that is a poor allocation of cash, given the circumstances, but taking a step back – why did they even need the bailout money in the first place? My guess was that it had something to do with trying to maximize profitability rather than spending wisely.
And our government? Can you imagine if they spent less than they earned each year and had a surplus? Crazy talk – I know!
It starts with the small things
But, interestingly, even though a corporation or a government is it’s own entity, decisions are still made by people. And their bad habits leak into the decision-making. You can bet the execs at AIG or Politicians in Washington just make business financial decisions like they make decisions regarding their personal finances. What if they had remembered the lessons they learned about money in 2nd grade? How different would the world be today?