Saving your way to wealth

The first basic economic principle of wealth generation applicable to individuals, families, organizations and governments is to consume less than you produce.  In monetary terms, spend less than you make.  In business and government terms, expenses have to be less than revenue.  The excess amount becomes wealth.

This sounds so proverbial that people often ignore it.  However, it is a true principle that is being neglected by so many people and by nearly every level of government around the world that our current economic well-being is at severe risk.  Too many people now believe that society can spend its way to prosperity--sort of a "pass the wealth around" attitude.  Without a return to the age-old wisdom of saving our way to prosperity (or wealth), rather than insisting that we can spend our way to prosperity, we are positioning ourselves for challenging economic conditions in the future.  The consequences will surely follow our choices.

Frederic Bastiat's classic story may help illustrate why saving (spending less than you make) is much better in the long run: Two brothers were both left a trust paying an annual income of $50,000 per year.  The first brother spends lavishly and is adored by those in the community who are the recipients of his careless behavior.  To those locally who receive his money, he is praised for his contribution to their well-being--after all, he is providing employment to them.  Seeing the benefits of his spending, he dips into his capital and spends more than his $50,000 per year, mistakenly believing that his actions are actually benefiting society.

The second brother, on the other hand, lives much more modestly and spends about $25,000 per year.    The community that observes the lavish spending of the first brother believes that the second brother is not helping them by spending his money in their establishments and denying them the opportunity for additional income--they don't see the long-term benefits of his prudence.  Unfortunately, they are not aware that the second brother's savings is actually providing employment to those unseen to them.

When the second brother invests his savings, that money is used by banks to fund new businesses and capital that is used to produce more goods and services.  The $25,000 being saved is actually funding as much employment as the same amount spent directly on consumption.  In other words, saving is only another form of spending,

After many years, the first brother is broke.  The people he was providing employment are no longer receiving his business and after seeing the consequences, consider him a fool.  He now looks to his brother for relief and claims that it isn't fair that he doesn't have any money and his brother is wealthy.  He believes that the government should provide him with at least a minimum amount of money for sustenance and argues that wealthy people should be taxed to provide for the poor.

The second brother, having practiced sound economic principles, continues his ratio of spending to saving and provides even more jobs because his income through investment has grown.  His capital wealth and income are greater and he has contributed to the nation's productive capacity.  The first brother has not.