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When you think about it, what is money? Something you use, you spend, you need for food and your home. Yes, it is all those things. But if you were to break it up, essentially, money has these three roles in your life, it’s quite like a circular relationship.

MONEY CYCLE A

1. You earn/inherit/are given money
2. You spend money
3. You save money

REPEAT

At any given point, you are doing one of the three things with money. There are other roles, but they will roughly fit into one of these three moulds. Although it is written in a bullet form here, in reality, it’s more like a cycle. If you keep doing these three things, you keep recycling the money and life moves on. You keep accumulating savings which can then be used later in life.  Nothing wrong with this cycle, except that certain circumstances could result in putting brakes on one of the three. If spending stops, then you are saving more for the future, which is good. But what happens if and when brakes are applied on earning?

Today we are all living through one of the greatest pandemics the world has seen. Job losses and pay cuts are becoming common place; incomes are pausing or shrinking. Even in times where there is no global crisis, uncertainty is a part of life.

In fact, there will be a point in all our lives when final and definite brakes get put on earning – it is called retirement.

One more thing can happen, your spending starts to exceed your income. It could be that income has reduced (pay cut) or has stopped or just that you seek to spend on more stuff.

What then?

What if we were to change this up a bit and envision the flow in this form:

MONEY CYCLE B

1. You earn/inherit/are given money
2. You save money
3. You spend money

REPEAT

Now, you are saving before you spend. Why? In the eventuality that brakes get applied on earning, you have a cushion of savings to keep moving forward. If there is just one thing you can learn from the COVID 19 health crisis which has fast turned into a financial and economic crisis world over, it’s that SAVING SUPERCEDES SPENDING.

The question then arises, rather two questions will arise.

1. What if you don’t have enough to save?
2. How much should you save?

While these are valid questions, we will leave the answers for the next blog and continue on this one about why you must change your money roles from cycle A to B.

Why not just borrow the shortfall?

If spending goes up beyond earning or if earnings get stopped, there is an alternative to borrow as banks and financial institutions are more than willing to lend. However, you are making that change from A to B really to avoid replacing the saving with borrowing. Unless you are a bank, don’t get into the habit of borrowing. Sounds ironic, but it’s best for you as an individual to rely as little as possible on borrowings which force you to get trapped in a cycle of paying interest. This cycle becomes harder to complete in times of economic crisis.

Once you start borrowing to facilitate your spending beyond your earning, you will realise that you have more and more interest to pay every year. First comes the car loan, then the housing loan, the credit card overdrafts, the personal loans and so on. This is the vicious cycle you must avoid and this is the reason why you have to prioritise saving over spending.

Secondly, at some point in life you will have to content with slowing or even no income. The earlier you prepare for this the better off you will be when that time comes.

In fact, job security is no longer a given and it is imperative to starting saving early in life.

For how long should you prioritise saving overspending? Ideally, until you have accumulated all the wealth you will need in your lifetime. Practically, at some stage, your earning will grow to accommodate higher spending. However, given that we don’t have a bottomless pot of funds, keep mindful about your savings.

You must focus on savings at least till the time you have accumulated –

• An emergency fund which can sustain your living expenses for at least 12 months
• Built a sufficient long-term investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... portfolio which can grow with the regular savings that you continue to pool in

All this can take you at least the first 5 to 7 years of your earning life. But in an earning journey that can last you 30 -35 years, going slow on spending for the first 5-10 years is not asking for a lot. It can, however, add significantly more to your wealth pile by the time your income begins to recede.

Summarising…

Your money has three main roles, income generation, spending and saving. Always focus on maximising income and savings, spending should be need-based, to begin with. Until your income is large enough to accommodate luxury, don’t overindulge and prepare well through planned savings.

SAVE BEFORE YOU SPEND. START NOW!

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