Blog

Keynes Forecasts an Era of Plenty

In the midst of the Great Depression, the famous economist John Maynard Keynes gave a speech entitled “Economic Possibilities for our Grandchildren.” He speculated that a hundred years from 1930, the wealth of the world would increase to such a degree that individuals would need to adapt to the new reality that they no longer need to spend their days struggling to meet day-to-day needs. In other words, Keynes believed that financial freedom would be common.

He predicted a time when the combination of the power of compound interest and new technology would lead to a world of plenty. People would need to find new direction for their lives because of the ample amount of free time they would have.

In his own words: “It will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

While we can look around and see that the economic problem has not been solved universally, we can see that he spoke with a great degree of insight. Technology, economic freedom and capital markets have worked together to produce the greatest abundance of wealth distributed across the largest population than in any other historical time. The potential for financial freedom is there for anyone who lives in a free market economy; three key differences between the rich and the poor come down to financial education, discipline and desire.

So what are the building blocks to creating the kind of time freedom which Keynes believed would come about in our generation? Let us examine them in order.

The Earnings Potential

The first ingredient to building a wealth structure in which to live your life is your ability to earn an income. And of course, your ability to earn is directly related to the value which you are prepared to deliver to meet the needs and desires of others. A successful ability to earn comes down to both willingness and capacity.

One may possess the capacity to earn but without the motivation; alternatively, one may possess the motivation without the proper skillset, education or opportunity.

Earnings potential requires the convergence of the following:

• Location – Is your particular skillset in high enough demand where you currently reside? Is it something which is location-independent, meaning it can be provided remotely from any location?
• Willingness – Do you know your “why” behind the drive to earn? Are you motivated to move away from one kind of lifestyle and toward another? Have you clearly defined what that is, and the reason for moving in that direction?
• Education – Have you invested in the education necessary to provide the quality good or service of your choosing?
• Personality – Does your career choice match your personality and take advantage of your core strengths?Knowing your personality type in terms of the Enneagram or Meyers-Briggs categorization methods can help you think through what careers you may be most satisfied in, and the ones which you will be inspired to dedicate effort and time to.
• Experience – Experience develops and proves your skillset. It provides concrete evidence of your abilities to potential employers as well as your dedication to the task. This becomes a massive asset with time.

Carefully assess each of these points which make up your earning potential. Is there an area that could use improvement? If cash flow is an area of difficulty in your present situation, it may be time to invest in a change or improvement to one of the areas listed above.

Expense Control

Taking full control of your spending is indispensable if you are going to get serious about building wealth. This doesn’t mean strapping down the budget to the bare necessities; far from it! While that may be necessary in some cases that are temporary (during job loss, in an entry level position, during a high expense season of life, etc.), the real value comes in gaining a clear perspective of where money is being spent.

It is very easy to lose track of just how much one is spending. The little things add up! By first tracking spending, and then determining a blueprint for a realistic goal, one can usually find ways to earmark a certain percentage of their income to save away for accumulation.

The avoidance, or the elimination, of consumer debt is of utmost importance in controlling expenses.

While a mortgage and a car loan are also debt, they are debts backed by physical assets (collateral) which could technically be sold and turned into cash.

Credit card debt is different; there is not much in the way of assets to sell. It’s just there, usually accumulating an exorbitant interest rate, and can easily lead to a tight budget at best, or a negative cash flow at worst.

Managing expenses to a level that allows you to save away at least 5% of your earnings, or 10% as the ultimate goal, is the second step toward eventually gaining financial freedom.

For help getting started with the budget, check out Minimizing Expenses for Maximum Surplus.

Investment in the Future

Investing simply refers to the dedication of something valuable in the present to a greater cause, with the expectation that it can be organized into a larger whole which improves its value with time.

With respect to earnings potential, one might invest in further education to obtain the skills necessary to improve performance.

With respect to expense cutting, it might be something like improving energy efficiency in the house.

And when it comes to saving, investment in assets such as equities, bonds, cash, real estate, commodities, alternatives and direct business ownership has the potential, with varying degrees of risk, to grow your wealth over the years.

We will focus on the details of these various types of investments elsewhere, but for now we will categorize them into three main headings:

• Financial Markets
• Real Estate
• Business

With these three types of asset ownership, an investor takes on calculated risks and makes the necessary adjustments to his or her plan as the risks and rewards play out over time. A financial advisor or a wealth manager might be a useful companion for helping educate about investment opportunities, risks, and strategies that are customized to your particular situation. Putting together a plan that synchronizes with your particular time horizon, goals, risk aversion and financial capacity can set you on a course toward building a powerful structure of wealth from which you can reap tremendous rewards.

The amount of time this takes will depend on several factors, of course, but even the smallest change of habits can alter the course of your life and make a world of difference for your future reality. Financial freedom is the prize to be won when you create a map and follow the checkpoints faithfully.

Conclusion

I believe that in a free market society, everyone of sound mind and health has the potential to step through the stages of building a life of financial freedom. A rare handful of people jump straight into business and become millionaires in their 20’s, but that’s not most of us. For the rest of us, there are things we can control: identifying our strengths and weaknesses, becoming educated in areas of interest, landing a job in which we can learn and develop valuable skillsets, budgeting to put away 5-10% of our income, and feeling out the opportunity landscape as our wealth and skills begin to grow.

Take some time to think through your earnings potential, expense control, and investment in the future. Determine what can be altered in the present and what can be altered over the next year. What baby steps will you take toward improving these strategies?

Each individual’s situation will be different, but know that it is never too late to alter the course of your career and life. You may have done the same thing day after day for the last twenty years; no matter. Maybe you love what you do, which is a rare but extremely valuable success. If you so desire, though, this can be the day you resolve to change things around!