THE primary metric of a national economy's health is its gross domestic product, or GDP.
While it isn't a perfect measure of national economic vigour, it is a pretty good one. This is because GDP gives us an objective way of assessing the absolute value of all finished goods and services produced and transacted in a country throughout the course of a year. This value is usually denominated in United States dollar terms because that is currently Earth's primary reserve currency.
So, if a nation's GDP is to rise healthily then more — as opposed to fewer — economic (or matched "sell-buy") transactions need to occur within that country's borders.
Translation: The more people spend, the stronger their national economy grows.
Now, stop for a moment and think about what that means for us as individuals...
If we all rush out and spend our money at a frenetic pace, perhaps even using borrowed money after our own funds are depleted, to buy ever more stuff in Malaysia's markets, shops and malls, our "generous" actions will boost Malaysia's national GDP but they will tank our personal finances.
So, if our goal is to build a strong financial life, we should exercise delayed gratification. This will involve giving up some good stuff now so we may build up savings and investments that can later pay for the finer things in life we crave to enjoy more of as we age.
TEMPORARY DEFERMENT
Over the course of a normal lifespan of say 70 or 80 or 90 years, there should be a long multi-decade season of sacrifice which allows for our savings to build up first and later for our investments to compound and grow.
Those who find themselves able to proactively choose to exercise delayed gratification in their earlier decades will be able to construct portfolios that pay for much fancier things and experiences in their later decades.
However, always remember that delayed gratification is merely temporarily deferred gratification and not permanently denied gratification. At some stage, our accumulated money should be spent. Otherwise, what's the point of all our sacrifices?
So, in my opinion, all of us should first aim to focus most of our sacrifices early on in our careers. It was Benjamin Franklin, my favourite American Founding Father, who observed in his 1758 classic The Way to Wealth:
"It is easier to suppress the first desire, than to satisfy all that follow it."
Inevitably, as we defer some expenses, preferably early on in life, we'll find we have some money to save. Also, along the way, we should take time to think and learn about sound investing.
Later, after our savings and investments bear fruit and generate growth, it is only logical for us to expend rising sums of cash on our families and ourselves.
ORGANISE OUR AFFAIRS
Circling back to my opening explanation in this column, remember that as more and more of us spend ever growing sums of money, our country's GDP will steadily expand.
Consider this: Just as bigger muscles provide us humans with greater strength, improved functional fitness, and enhanced vigour, a growing GDP boosts our country's economy.
So, both for national "service" and personal quality-of-life uplift, we should:
1. Arrange our affairs in a way that will help us maximise our total expenditures over our lifetimes, yet also intentionally backload (or delay) them instead of frontload (or hasten) our big, fun, flashy, status-bumping expenses like flying business or even first class, eating at pricier restaurants, holidaying more often, and generally living large(r); yet also
2. Aim to pay for these higher, later, expenses with a portion of sustainable passive income instead of with depletable earned active income or, worse yet, by selling assets or piling on debt.
To clarify those suggestions, please:
1. Only layer-on more expensive upper crust expenses as you mature IF you spend that money on items or activities which interest you a lot, fill your soul with joy and satisfaction, and expand your personal horizons; and
2. Spend just SOME of your growing passive income, but not all of it, on those "living-large" goods and services. Leave a portion of your accruing passive income from, ideally, different sources inside your savings and investment portfolio (SIP) to graft onto your original capital sum to enlarge it. This will allow your passive income per unit time (PIPUT) to rise from one year to the next. And that, by the way, is the only way to ensure you incorporate a viable hedge against the relentless inflationary bombardment our world endlessly hurls at us.
The four forms of passive income most of us can cultivate are streams of interest from cash savings, dividends from the Employees Provident Fund and stocks, cash distributions from income-focused unit trust funds, and rental inflows (directly) from brick-and-mortar investment real estate or (indirectly) from REITs (real estate investment trusts).
Your proactive process of building wealth will probably take decades and undoubtedly involve the non-negotiable stages of sacrificing, saving, and investing before you reach the fun, mature stage of revved up (responsible) spending.
So, do aim to enjoy both your journey and your destination.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).