Cash Flow Conundrum

Conventional wisdom tells us that one of the sure fire ways to get ahead is to earn more. Whether that’s through a promotion, salary negotiation, changing jobs, or side hustle, is up to us to figure out, but the idea is that as long as we earn more (then more, and more), we’re on the right track.

I don’t completely disagree with this, but what typically happens is that we forget to save our extra earnings once we get them. It’s impossible to progress towards financial independence (FI; sometimes called retirement) if you don’t set money aside. If we take higher paying jobs or pursue a more lucrative field in order to be “better off,” the move is neutral if our cost of living (COL) grows and we keep spending everything we earn.

[Beyond the scope of this post is the observation that being better off typically means having more things (material or experiential), or better versions of things one already has, instead of less visible things like advancing one’s financial position (e.g. paying off high interest rate debt or saving for financial independence). Also for another time: why we should even care about being financially independent.]

I made this table to organize my thoughts on the matter.

The cash flow situation for people in the lower left and upper right is neutral, even though earnings are on opposing sides of the spectrum. They spend what they earn. This is commonly known as “living within your means” and commended, which makes sense when a common alternative is living in a cycle of debt.

That’s what is happening to households in the upper left piece. They’re spending more than they earn, relying on debt to finance their lifestyle. If the goal is to change the situation, you’ll face a couple difficult options: earn more, which can be out of your control, and/or spend less, which requires discipline. If one or both of these things is accomplished, you’ll reach either neutral position, and might consider pursuing FI from there.

People in the lower right quadrant have the most flexibility–spending more, earning less, or reaching FI are all realities.

 

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