EQUALIZING INCOME AND EXPENDITURE
BY SCRUTATOR And so, from hour to hour, we ripe and ripe, And then, from hour to hour, we rot and rot.
TOUCHSTONE'S epitome of the growth and decay of human life carries perhaps a deeper message for the prac- tical man than for the philosopher, poet, or physiologist, for it implies complex and interesting financial questions. The formative or childhood stage of man is non-productive while involving a considerable outlay- for food, clothing, housing and education. This expenditure has to be borne by the parent. Revenue earning capacity follows the development of physical and mental powers. The precise age or period at which those powers reach their highest perfection is debatable and differs with each individual. Nor do those powers persist indefinitely at that level ; decay sets in and they decline until extinguished by dissolution.
Broadly speaking, there is a relationship between the ripening and decay of the intellectual faculties and earning capacity. Knowledge and experience have their reward in bigger profits or emoluments. After a man has passed his prime his zest for business loses its keenness, and with the waning of his energies work becomes increasingly irksome. It was recently suggested in an original pamph- let issued by a well - known company, that a man should contemplate his business career as a curve. This is certainly more likely to represent the reality than a straight line. Anyone who takes the trouble to plot the probable course of future earnings and expenses will obtain a clearer conception of the problems ahead. Paradoxical as it may sound, the object of making or earning money is to spend ; one's necessities and desires are, the stimuli to the will to earn. As soon as a man's income exceeds his own needs he thinks of marriage and a household. Then the children come and have to be provided for • later on, they have to be educated and afterwards started in life.
Two CURVES NECESSARY.
Two curves should therefore be shown on the graph of the financial future—one tracing the probable course of income and the other the probable course of expenditure. The curves, in most cases, will not run parallel ; they will diverge, converge and intersect. The income. line will normally ascend to a certain point and then trend down- ward. The expenditure line will tend to be erratic, rising sharply in places, as, for instance, where a child's educe. tion has to be allowed for. Hovering over the graph is the angel of death, who may precipitate the income curve into a vertical descent to zero. The problem is to prevent the expenditure curve protruding above the income curve, or, in other words, to ensiire the correlation of the two curves.
Where the income curve is the higher there is a surplus but when it passes below the expenditure curve a deficit ensues. Obviously, the surpluses should be applied to make good the deficits. This leads direct to the heart of the matter; the true objective is to secure an equilibrium between income and expenditure throughout the whole of life. Mere accumulation of surpluses until they are wanted to redress deficiencies carries no guarantee that it will suffice for the purpose, as many of the factors are uncertain and incalculable. Life may be prolonged beyond the age assumed or it may be unexpectedly brief, and a wife and children extend a man's responsi- bilities beyond his grave. It would be folly to allow the surpluses to remain idle in the bank, but if invested they might not be realizable when required except at
a loss. _ BENEFITS OF LIFE ASSURANCE.
Life assurance offers the means of most completely fulfilling the end in view. It is the only method pos- sessing the requisite flexibility for meeting every con- tingency. It gathers up superfluous income as it accrues, invests it at compound interest (which cannot easily be done by the ordinary investor) and releases the money thus fructified when it is wanted.
The minimum difference between the curves and the interval that elapses before the expenditure curve rises above income give the constant minimum annual sum that will be available for a certain number of years. Temporary projections of the expenditure curve above the income line may be ignored, as this period could be financed by loans on the policies. This constant mini- mum sum should be allocated- to annual premium poli- cies, because these afford the largest amount of imme- diate assurance. Besides this constant minimum over the greatest number of consecutive years the graph will show constant minima over shorter periods, and balance or isolated sums varying in amount for single years. These various groups of sectional surpluses for differing terms can be turned to full account by taking out separate policies with the payment of premiums limited to the indicated number of years or -to a single premium. The policies would be timed to mature as and when needed to supplement income.
CONTINGENCIES.
The first contingency to be Provided for is the cessa- tion of income by death. If the constant minimum sum will assure an amount payable at the end of the elapsed period or previous death sufficient (when added to other life assurances) to produce the desired income, then an endowment policy-should be - chosen,' bid otherwise the choice should be a whole life policy with annual premiums ceasing before the end Of the elapsed period, as this will give a larger capital sum than an endowment policy. Should the necessity for the death provision subsequently I lessen, or disappear, the whole life policy could be sur- rendered for cash to produce additional income. If the graph shows that the income and expenditure curves regularly converge Or diverge over a lengthy period the sums secured under either of the foregoing 'plans could be increased by selecting descending or ascending premium rates. The income curve will probably not dip perman. ently below the expenses curve until after the age at which many men will wish to be free from the worries of business. The retirement age will therefore be to some extent a voluntary choice, to be determined by the date at which funds will be available to yield an adequate income to replace business profits or earnings, after providing for Other obligations.
The chief of these obligations will probably be in connexion with the education of children, the cost of which, assuming that the death protection already existing is sufficient, can be secured by a policy for the child, or by a pure endowment, providing for the sum assured to be distributable in equal instalments over the education period. A similar policy can be effected to assure the money required to start a boy in business or, in the case of a girl, for a marriage dowry. A small addition to the normal premium will free the policies, in the event of the father's decease, from further premiums. If, however, the existing assurances on the parent's life are inade- quate, the cost of a child's education is better secured by a supplementary endowment on the life of the -father for a term maturing at the beginning of the educational period. INCOME IN LATER LIFE.
When other obligations have been provided for all remaining resources can be devoted to supporting income in later life. The maximum product from those resources can be obtained by the purchase of an annuity. Of course, in buying an annuity one parts with capital, but where husband and wife only have to be considered, or either alone, capital has no value except as a means to income. The annuity should be payable throughout the lives of both, or, rather, as the expenses of one person are less than of two, a smaller annuity could be arranged for the survivor. Or, again, supposing a man wished still to continue at business, an. immediate annuity could be arranged to keep his income at the desired level, a larger annuity sufficient fully to replace his earnings being deferred until his actual retirement. The application of surplus income to policies selected to mature about the dates when increased expenditure or reduced earning capacity may occur guarantees that funds will be available to counterbalance the change. This imparts confidence and prevents anxiety, enabling a man to develop and use his abilities to the fullest extent.
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