12 November 2012
The successful execution of the Consumption Theory boils down to your perspective and approach to money. It's like the fork in the road. If you view money as a satisfier of today's itch instead of a weapon against future threats you will struggle with being able to carry out the practices of the Consumption Theory and convert income into wealth. Resources are not all meant to be consumed immediately or sometimes, consumed by you at all. As an entrepreneur you must recognize when resources within your grasp should be used, consumed, stockpiled or used to reproduce more resources.
Let me sidebar for a second. When it comes to your income, before you splurge on anything it should qualify for one of four factors: you enjoy the source of the income (satisfying), it's abundant (significant), it's sustainable (reproducing), and has longevity (long-term).
The Consumption Theory allows you to live in an economic straight line no matter what is going on around you. Follow it and you won't feel like you are on a financial roller coaster. You won't be up and down in what you can or can't do and you won't find yourself going from side hustle to side hustle. No slow economy or market threats will easily impact your consumption. They will first affect the activities within the other detailed percentages outlined in the book, often leaving your personal lifestyle with no immediate affects.
Consumption Theory simply says that you should aim to live on 10% of your income if you expect to weather financial storms that WILL come: family emergencies, trauma, unemployment, unexpected repairs, slow economy, retirement, accidents, illnesses, etc.
Let me go through some examples of how you can incorporate the "Consumption Theory" into your life.
Popular Culture Example:Salary = $100,000Time = 20 yearsSavings Rate = 10%Consumption/Spending Rate = 90%Retirement = $200,000 on handLifestyle Sustainability upon Retirement = 2.2 years
Consumption Theory Example:Salary = $100,000Time = 20 yearsSavings Rate = 90%Consumption/Spending Rate = 10%Retirement = $1.8 millionLifestyle Sustainability upon Retirement = 90 years
All examples excluding inflation, increased tax burdens, health challenges and transfer payments.
Okay. Living to $10,000 (10% of example) in America in this day and age may prove difficult, not impossible just difficult. In this case you want to focus on increasing your earnings, not your spending.
For those of you who can't set aside any portion of your income for an extended time I've coined your spending a "disease"; an addictive disease that may haunt you in your senior years, and sometimes immediately, unless you cure it or find a frugal spouse to offset your issue.
If the full consumption theory is too extreme for you, consider this modest example I calculated at 50% consumption. If you merely have a salary of $100,000 and you saved 50% of your income for 20 years you will have stocked $1 million. You will be able to live another 20 years on your nest egg at the same lifestyle, give or take inflation and health.
Pretty much, for every year you simply stockpiled 50% of your income equates to one year you won't have to work while maintaining the same lifestyle.
The overall philosophy of the Consumption Theory is to not consume based on what you have, but instead consume based on what you want to have. This theory expedites the success rate of an entrepreneur.
Just be careful not to attach yourself to people in your young days that will make you miserable and regretful in your old days. Use having additional resources as an opportunity to have more, not as an opportunity to spend more and you will spend more time in bliss. Remember, arrogant people may get rich but humble people get wealthy.
Devin Robinson is a business and economics professor, serial entrepreneur, founder of Beauty Supply Institute and author of 8 books. His latest book is "Power M.O.V.E.: How to Transition from Employee to Employer". Learn more about him at www.PowerMoveBook.com or www.DevinRobinson.com •