This logic is not new - as Charles Dickens put it into the mouth of Mr Micawber over 150 years ago: essentially your financial success depends on your lifestyle, in particular the balance between income and expenditure.
The logic is pretty simple at heart, as shown in the graphic: your financial well-being depends on your lifestyle, in particular the balance between income and expenditure.
There are two feedback loops at work:
- a surplus (income > expenditure) produces positive feedback, leading over time to additional income, increasing wealth
- a deficit (expenditure > income) produces negative feedback, leading over time to additional expenditure (in the form of interest payments), decreasing wealth
It is an reality that is memorably summed up in Mr Micawber's plaintif declaration (in David Copperfield):
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
[This was in the days when a Pound was made up of 20 shillings - and a shilling was 12 pence; so 'nineteen six' was 19 shillings and 6 pence or less than a Pound.]
Now, this is just the starting point, of course: once you are on the happy path of having adopted a lifestyle that generates a financial surplus, the magic begins. The magic of compounding or the Money Snowball, as I like to think about it.
And it is just a small step from there to focus on an income-oriented investing style, as this is consistent with a view of the key role that surplus income plays in growing your wealth. This focus on income makes it easier to think about what to invest your money in: your criteria are yield and risk - factors that you assess by yourself pretty much, without paying someone else to do it.
Of course, there are other investment styles that can prove successful but for me they lack the simplicity and coherence of a focus on income. Keeping my expenditure under control and having regular surplus income from a range of sources and asset classes is a great reassurance in difficult times.
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.