” It takes discipline and focus in order to save for the future. “
This picture is what we refer to as the personal economic model. The fact of the matter is, everybody has a personal economic model. We use this diagram as a tool to show people how money works in their lives. The ultimate goal is to get to position A, where there’s enough money in the future lifestyle tanks, the risk and the safe tank to support our current lifestyle in retirement and through our life expectancy. So let’s take a look at how money works in our lives.
Let’s start by taking a look at how money enters our system. You’ll notice over here, we have the lifetime capital potential tank. You’ll also notice that this is the largest tank on the screen. That’s because anytime we earn income, whether it’s at our job, maybe an inheritance, maybe we will win the lottery, all that money flows through our lifetime capital potential tank. It doesn’t stay in there and it goes right through this tube and then hits the tax filter. Did you put the text filter on your personal economic model? No, none of us do.
It comes pre-installed on all the models and the government puts it there. What it does is, it diverts money from our lifetime capital potential and it diverts it into the government’s personal economic model. Once the money flows through the tax filter, we then reach our lifestyle regulator. This is where we have some choices. We can either save some money for our future lifestyle, or we could spend 100% of our income on our current lifestyle. After money flows through and is spent on current lifestyle, there’s no getting it back into our system and it makes it very difficult for us to reach position A. Rather than consuming all of our income. We have a choice as to how much we save for the future. Notice, that our future lifestyle tube is pointing upwards. It takes discipline and focus in order to save for the future.
Now we have some choices. We could either put money in the investment tank or the savings tank. Notice that the investment tank is labeled “risk”. There’s no lid on that tank. Depicting the fact that we have the potential to possibly lose some money in that tank. Alternatively, we can put money in the savings tank. The savings tank has a lid on it depicting the fact that we could never lose money in that tank. As long as money is in that tank.
Remember the ultimate goal is to get to position A, where we could turn off our income and we have enough money in both of these tanks to fund our lifestyle through our life expectancy. But what happens if your lifestyle regulator is turned up to 100%? That means that you’ve had very little success in saving money for the future. In the past, maybe you have a little money in your 401k at work, and maybe you have a bare minimum of an emergency fund. What happens when you’re in this position is that you have no access to capital. What happens is, you’re forced to borrow money and take on liabilities.
Maybe you have a little bit of credit card debt. Maybe you have a car loan. Maybe there’s some student loans that you haven’t had the chance to pay off yet. Notice that all of these debts have no collateral. The money spent on the credit cards, that’s gone. The car is a depreciating asset that the bank really doesn’t want.The car and the education, they can’t take your education back. So you have no collateral. But the fact of the matter is you do have collateral.
You are obligating your future income to pay those debts. And by obligating your future income, that reduces your future lifestyle and further compromises your ability to save for your future lifestyle. Consequently, that really puts in jeopardy your ability to get to position A. As you can see, we use this personal economic model to show people how money enters their system. More importantly, the consequences of all the choices that they can make with their money. Are you living within your means? If you’re not sure, we recommend you start with a budget. Take inventory of what you have coming in every month and what your monthly expenses are and what you could reasonably afford to save every month.