Wealth Comes from Cash Flow, Not Income

Posted by Mike Smith :: November 19, 2007 @ 6:29 am

Janice Revell wrote a clever article on the lessons that could be learned from Britney Spears' spending habits. The article ties in nicely with a recurring theme on the Lending Club blog: your income doesn’t determine if you’re wealthy. Wealth is a measure of what you have left after your income and expenses are reconciled.

The article goes on to explain that despite a monthly income of about $737,000, Britney is not saving or investing. The details were revealed in recent court proceedings. While it’s hard to believe that someone making almost 9 million dollars a year isn’t wealthy, the fact remains that her spending habits are forcing her to live paycheck to paycheck.

We can all learn a lesson from this. In order to build wealth, you need to spend less than you earn. It’s a simple idea, but one that is rarely observed in our society. As I said in my post about saving your financial future, the average savings rate in our country is less than zero. That means that most people live beyond their means.

Savings comes in many forms. For some it’s stockpiling money into a bank account. For others it’s investing in P2P loans through Lending Club. Still others are funding their retirement accounts. For many, it’s a mixture of many types of savings vehicles. Depending on your age, you’ll likely choose a different mixture of ways to save.

Younger readers have the advantage of time. The point of the referenced article is that someone in their mid-20s can attain a nice retirement by saving about 8% of their income in a 401K or similar tax-advantaged way. That capability comes from the fact that their investments will have time to accumulate compounded interest over the years. Obviously some assumptions about rates of return, inflation, etc., were made for the calculations, but those assumptions were all reasonable.

Regardless of your age, and subsequently your preferred method of savings, you’ll only be able to save by keeping your spending below your income. Doing so will allow you to build your wealth more quickly than even some of the highest paid superstars of the day.