Your options for what to do with your money seem as boundless as the prairie sky I grew up under. But in truth your options are limited, because you can really do only five things with money:
- Spend it
- Save it
- Invest it
- Pay taxes with it
- Give it away
Slice the pie however you’d like, but those are your options – five pieces. Only two slices are mandatory: spending and paying taxes – for most people. We all have basic needs that require spending. I don’t know anybody, and have never heard of anybody, who is completely self-sufficient, who produces everything they need to live or makes enough of anything that they can barter for everything else they need. Everyone spends something.
Despite the talk of zillionaires that pay no taxes, it is almost impossible not to pay some income tax. Your income will almost certainly be taxed. But taxes are not as ironclad as many think either. The U.S. tax code provides many opportunities to reduce the taxes you have to pay. It is neither illegal nor unethical to reduce your tax bill in ways provided by the tax code.
The other three categories – saving, investing, and giving – are completely voluntary. Many people have chosen, to their detriment, not to cut their pie into that many pieces no matter how big or small the pie.
Few of us have the resources to do everything we would like with our money, so we need to establish priorities. We have to understand our options and how they interact, clearly. A bigger slice for spending reduces the size of all other slices, except paying taxes. On the other hand, less spending may increase the size of the investing or giving slices, which may also decrease the size of the tax slice. The objective of financial planning is to increase our control of the size of each slice.