Photo by Mulad

“Annual income twenty pounds, annual expenditure nineteen pounds and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

- Mr. Micawber, from David Copperfield

There is a narrow margin between victory and defeat; between joy and misery; between savings and debt.  Look at any sport.  A one-point difference made the Giants the winners of Super Bowl XXV, while the Bills suffered the first of four Super Bowl losses.  Such a narrow margin.  If Scott Norwood’s kick hadn’t  gone wide right, who knows what would have happened?  The Bills may have started a winning streak instead.

Narrow Margin

Branch Rickey said baseball is a game of inches.  Just look at the ground ball that went through Bill Buckner’s legs in the 1986 World Series, or Derek Jeter’s home run that a fan snagged from Tony Tarasco in the 1996 playoffs.  The same can be said of personal finance.  Spend a little more than you earn, and you’re going to owe someone.  But cut back just a little, and you can stick that savings in the bank.  It’s important to be the one with the extra cash, because you’ll be earning interest, instead of owing it.  Like in baseball, you should start accumulating savings in the early innings, so that you can cruise later on in the game.

Moving the chains

But enough with the baseball metaphors.  Let’s move on to football! In order to get a first down in football, you need to gain ten yards.  This moves the chains, and gets you closer to the end zone, which is the ultimate goal.  Gain a little on each play, and keep moving forward (savings).  Lose yardage due to a sack, and you move backward (debt).  If you gain more than you lose, you should move down the field to the end zone (financial independence).  But the path to financial independence is different from scoring a touchdown, because there’s one element missing in football: Interest.

Interest

Ah, the magic of compound interest.  If you gain 5 yards in football, the referee isn’t going to tack on any extra yards.  That’s the one advantage of savings: someone will pay you for holding your money.  It’s also the big disadvantage of being in debt, as you have to pay someone else to use their money:

Interest [on debt] never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.
- J. Reuben Clark Jr. in Conference Report, Apr. 1938:103.

So, let’s win this game of inches.  Spend less than you earn.  Keep moving those chains toward the end zone.  Choose happiness over misery.

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