“A fool and his money are soon parted.”
Benjamin Franklin
Benjamin Franklin, Poor Richard’s Almanac; 1757
Quite literally, this quote says you need to be smart with your money; otherwise, you will lose what you have. This may seem like an obvious statement, but ever since it was first uttered this idiom is still very true. Over the years, and even with myself, I have noticed something that is true of all of us; when it comes to matters of money, it is hard for us to separate the emotion from it. Emotion tends to drive our decision-making skills when it comes to the money we earn. I think I have used this example before, but if we go shopping on an empty stomach, we tend to buy everything in the grocery store. What started out as a simple trip to pick up a few items quickly turns into a fully loaded cart of blocks of cheese, sweet confections and microwave pizzas. We just do not have as much control when it comes to our own money.
The quote, on the surface, seems like quite an insult, but when we apply it to modern times, it just illustrates we need to be smart in spending our money and in saving our money. If we consider someone that makes $30,000 a year and apply a few restrictions such as no raises and a target retirement date of 65, we can show something quite powerful. Making these assumptions and realizing this individual is only 30 years old, there is a finite amount of earning power left. Math is not always fun, but taking $30,000 a year for the next 35 years gives us the earning potential of just over $1 million dollars.
Doing a little more math, we realize there are 420 months in 35 years, now giving us $2500 a month in earning potential. It seems like a lot, but take into account this individual’s monthly obligations of, say, $1800 which includes a mortgage, car payment, utilities, credit card payment, food and incidentals. That leaves only $700 a month to put away, translating to only $294,000 of potential savings to go into retirement with. Considering this individual had to earn just over $1 million to last 35 years, and with the advancements in medical technology allowing us to live into our 90’s, I would say $294,000 is not enough. This individual now only has $980 to live on a month for the next 25 years. I would say with costs going up year after year and inflation not ceasing anytime soon. Benjamin Franklin was right in saying we need to be smart with our money.
I grant you I did apply some restrictions on the earning potential of this individual to make the example easier, but we never know what lies ahead for us. We can earn more, but we can also earn less. We can change jobs and earn the same, but the idea is when we have money, we should develop a plan to be smarter with it at the time because we never know what time will bring.