The secret to living beyond your means

How can one consume more than they earn?

The answer is that consumption is financed by one or both of two ways: you can either eat into your savings to make ends meet or finance the excess consumption through borrowing.

Unfortunately, if your earnings do not increase, the loans can also eat into your savings when you pay back the loan.

People do not borrow only from the formal sector, which includes banks and other financial institutions like SACCOs. They also borrow from one another, and as the following true story illustrates, personal borrowing can be hard to track down.

One day, Peter approached his colleague Paul for a loan. It was around the 25th day of the month and Peter explained that he was totally broke – that he didn’t even have money to buy milk for the kids.

Reluctantly, Paul agreed and loaned Peter Sh1,000. Peter thanked Paul profusely and promised to pay back as soon as their salaries were paid.

On the other hand, if Paul was interviewed, he’d not have recognised that the Sh1,000 is part of his savings.

True to his word, on the very day that salaries were sent to the bank, Peter paid back the Sh1,000. Paul thanked him for keeping his word and Peter explained that he understood how hard times were so he wouldn’t want to keep other people’s money unnecessarily.

Then on the 25th day of the following month, Peter approached Paul with another request for Sh1,000. He repeated the same story about hungry children and Paul lent him the cash. After all Peter had proven that he could be trusted to pay back.

SYMPATHY AND GENEROSITY

Again, on the very day that salaries were paid, Peter paid back the Sh1,000. True to form, on the 25th day of the next month, Peter went back to Paul for another loan – the same Sh1,000.

This time round he even called it “ile ka-thao yetu” (our one thousand)!

For the third time Paul lent him the money. But, perhaps because Peter had called it “yetu” (ours), it suddenly occurred to Paul that his colleague has been abusing sympathy and generosity to finance excessive consumption.

Every month, Peter was consuming Sh1,000 more than he earned and Paul was financing him! In one year, this could be a Sh12,000 excess. So when Peter came back the fourth time round, Paul declined, explaining that he too was broke.

With that single decline, Peter never again went back to Paul for a loan. He moved his scam to someone else! If Peter was interviewed in a survey to collect consumption data, he would have easily revealed that he spends more than he earns – Sh12,000 more yearly.

On the other hand, if Paul was interviewed, he’d not have recognised that the Sh1,000 is part of his savings. After all, don’t we all know where savings are kept? Either, in a bank account or under the mattress!