Thursday, February 14, 2008

How the World Works Financially

People can be split into two groups: 1) those who spend carefully, save money, and invest wisely, and 2) those who, to varying degrees, do not do these things well. For convenience, let’s call these two groups savers and spenders.

Some of the spenders’ wages get transferred to the savers, primarily in the form of interest on debts. Most interest paid by spenders becomes the profits of banks and other companies, which then gets distributed to shareholders who happen to be savers.

Of course, people don’t really fit into just two groups. Most people fall somewhere between the best of savers and the worst of spenders. You can think of people being lined up the side of a mountain based on how well they handle money with the worst spender at the top of the mountain. Now imagine money rolling downhill from the spenders to the savers.

Although I have called the two groups savers and spenders, limiting spending is not enough to make someone a saver. A saver must invest wisely as well. Imagine someone who never takes on any debt, but keeps all savings in a low interest bank account that fails to keep up with inflation. This will increase the bank’s profit and benefit the bank’s shareholders who are savers.

It may seem like being a saver is not much of a life, but in truth, it is only necessary to spend less than your wages for a while. Once you have some savings built up and invested wisely, the investments generate returns in the form of interest or capital gains. When these returns are large enough, they can be your new savings, and you can spend all of your wages. Later, you can begin to spend all your wages plus some of your investment returns. The best of savers can ultimately quit their jobs and live on their savings.

If you are a saver, one way to think of it is that spenders go to work to benefit you. If you are a spender, then you go to work to benefit savers, at least partially. No amount of claiming that money isn’t the most important thing in life changes the basic fact that spenders work for savers.

2 comments:

  1. I think I have been insulted....

    -c8j

    ReplyDelete
  2. Big Cajun Man:

    No insult ... thanks for all the fish :-)

    ReplyDelete