The logic is pretty simple at heart, as shown in the graphic: your financial well-being depends on your lifestyle, in particular the balance between income and expenditure.
There are two feedback loops at work:
- a surplus (income > expenditure) produces positive feedback, leading over time to additional income, increasing wealth
- a deficit (expenditure > income) produces negative feedback, leading over time to additional expenditure (in the form of interest payments), decreasing wealth
It is an reality that is memorably summed up in Mr Micawber's plaintif declaration (in David Copperfield):
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
[This was in the days when a Pound was made up of 20 shillings - and a shilling was 12 pence; so 'nineteen six' was 19 shillings and 6 pence or less than a Pound.]
Now, this is just the starting point, of course: once you are on the happy path of having adopted a lifestyle that generates a financial surplus, the magic begins. The magic of compounding or the Money Snowball, as I like to think about it.
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
[This was in the days when a Pound was made up of 20 shillings - and a shilling was 12 pence; so 'nineteen six' was 19 shillings and 6 pence or less than a Pound.]
Now, this is just the starting point, of course: once you are on the happy path of having adopted a lifestyle that generates a financial surplus, the magic begins. The magic of compounding or the Money Snowball, as I like to think about it.