Is Your Income A Snake Or A Ladder?



Question:  We live a life that is frugal enough to have savings at the end of each payday.  What is the best way of using such savings?  —asked at “Ask a friend, ask Efren” free service available at, Facebook and SMS.

Answer:  According to Wikipedia, Snakes and Ladders is an ancient Indian board game,  played by two or more on a gameboard with numbered, gridded squares. Ladders and snakes appear on the board with each picture connecting two board squares. The goal is to navigate your game piece from the bottom to the top square using the roll of one die, catapulted or brought back down by ladders and snakes, respectively.

The historic version had morality lessons, where a player’s move through the board represented a life journey complicated by virtues or ladders and vices or snakes.

In real life, your income, particularly your net income or savings, is your game piece.  But instead of relying on chance through the roll of one die, you have complete control of how you use your net income, whether as a ladder or a snake.

For clarity, your net income is the end result of deducting only necessary expenses from your gross income. Such necessary expenses would be your mandatory payroll deductions (including income tax), daily living expenses, tuition fees for children’s education, debt servicing and the like.  In other words, necessary expenses are your nondiscretionary ones.

Your net income is there for two purposes, to pay out as dividends to your household members for use in any which way they please and to reinvest in your household to potentially increase future consumption.  Future consumption can come in the form of a more lavish lifestyle, retirement, wealth transfers and more.

Personal finance does not teach that you always sacrifice your current standard of living just so you can enjoy more tomorrow.

In fact, a household that has a good amount of discretionary expenses, while still being able to adequately provide for future consumption, is an ideal one.

In the case of wealth transfers, for example, Stephen Pollan wrote in his book “Die Broke” that you do not need to work like a horse building up wealth only to pass it on to the next generation.

Pollan says that if you do so, you will be putting the quality of your death before the quality of your life.

Nevertheless, the priority should be your household’s future, of using your net income as a ladder.

The rule with dividends is that they are paid only out of unrestricted net income.

Using your net income too much as a means to enjoy present day consumption makes your net income a snake that will surely bring you back to square one.

How much of net income should you allocate for reinvesting in your household and how much can you spend for current consumption?

It all depends on your goals or the quality of lifestyle you want your household to enjoy first in the future and, second at the current time. These goals will vary from household to household because the personalities in households also vary.  What is certain is that you should not reinvest too much for the future that you lead to a miserable life doing so and avoid eating, drinking and being merry today because tomorrow you will die.


Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is a best-selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.


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