Accounting 101

Thoreau, GetRichSlowly, and a Whole New Perspective

This post is majorly influenced by two different sources: a combination of finance blogs that I read (GetRichSlowly, ManvsDebt) and the book “Walden” by Henry David Thoreau.

I started reading Walden about a month ago and am still working on it (since I’m a slow reader, it’s a tough book to read, and work has picked up). Reading this book has been very influential in the way I look at my lifestyle. Essentially, the book is about Thoreau, who builds a house at Walden Pond and lives off the land for 2 years. He spends about $25 dollars building the house and grows his own food. He lives a very simple life…something that I’m starting to want more and more. How does this tie to personal finance blogs and me? Stuff costs money…stuff is a responsibility…stuff is a burden.

“What should be man’s morning work in this world? I had three pieces of limestone on my desk, but I was terrified to find that they required to be dusted daily, when the furniture of my mind was all undusted still, and I threw them out the window in disgust.”

What does accounting have to do with any of this?

There is a simple accounting equation that goes like this: Revenues – Expenses = Net Income. Simply put, what you earn minus what you spend is what you keep. Translate this to your personal life and it looks something like this: Income – Expenses = Savings. Your expenses would include everything from housing to car insurance to eating out to vacations.

Essentially there are 2 ways to increase your savings: increase your income or decrease your expenses. Because time and freedom are becoming priorities of mine, I’m going to focus on the expenses side. In a typical household, as revenue increases, expenses increase. When someone increases their salary from $75,000 to $100,000, they’ll probably buy some new furniture, maybe a new car, etc. So Income ↑ – Expenses ↑ = Savings ↔. In this situation, the only thing getting richer are the car dealers and Best Buys.

Now consider another situation where someone’s Income stays the same, but they decide to really drive down their expenses. Income ↔ – Expenses ↓ = Savings ↑.

Now consider one more thing: your income will usually increase when you have more responsibility. More responsibilities means more work. More work means more hours…which means less of a life…so buy more things for satisfaction. Continue this endless cycle along with our consumerist society, and we’re running in circles.

What is it all worth?

This brings me to my next Walden quote, a totally different way of looking at purchases:

“The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run. An average house in this neighborhood costs perhaps 800 dollars, and to lay up this sum will take from ten to fifteen years of the laborer’s life…so that he must have spent more than half of his life commonly before his wigwam will be earned.”

Whenever I think of purchasing something, I really think about if I need it…or if I really want it. I compare it with what else I could buy with that same money. For example, I needed to buy a couch for my apartment in Boston. I could’ve bought a new leather couch, but instead I bought a used couch on Craigslist for $40. The extra few hundred dollars tied up in a couch wasn’t worth it for me, so I saved that money (and probably used it on traveling). I decided that the extra 10 or whatever hours of work wasn’t worth it. And a cheaper couch is much less of a burden since I can now easily get rid of it without worrying about the value.

Like I wrote earlier, the end goal for is to have time and freedom. Limiting unnecessary purchases lowers expenses, and as the expenses go down, the savings will start to grow. And like they say, time is money.

About Trent

I started Frugal Purpose to share my love of personal finance to assist your pursuit of a more fulfilling life. I am a financial analyst by trade, traveler at heart, and want to share with you the beauty of this world.

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