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Realization

October 13th, 2010 at 03:50 pm

So I had a realization over the past few days about saving which many people probably already know, but which is a new thing for me. I realized that the only number that matters is the percent of my income that I save into permanent assets. The total amount saved doesn't really matter since it has no relation to how much I spend.

This means I have to count some of my savings (for a car, house, trip, etc) as actually spending (just debtless spending). If these items counted as "savings" then the ultimate goal would be to avoid debt, but my ultimate goal is to build wealth.

So to buy a $15K car every 10 years, that would be about $1.5K a year in savings (in the avoid debt model). Or that could be $37.5K in assets (in the wealth building model) which would create approximately $1.5K a year.

This change in mindset was inspired by www.earlyretirementextreme.com. The guy is a bit crazy, but his ideas are both onerous and liberating.

Posted in Uncategorized | 2 Comments »

2 Responses to “Realization”

  1. baselle Says:
    October 13th, 2010 at 05:40 pm 1286991617
    1286991617

    This mindset also means that if you put $40 into savings but have to withdraw $40 for spending, its a win of $40, not a wash. Smile

  2. Joan.of.the.Arch Says:
    October 13th, 2010 at 07:26 pm 1286997969
    1286997969

    It is an algebra of personal economics that I have turned in my mind, too. On side which of the "equals sign" is the money you know you are going to spend, but are currently holding as "savings"? I resolve the puzzle by calling it "short term savings".

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