It could be said that all our money is spent on consumption. The issue isn't whether it will be spent on consumption, but when.

How can that be? What about savings and investment? What about retirement?

Well, they exist. But the purpose of the money you save and invest today is to provide for consumption tomorrow. In fact, if you examine how your money is spent, it falls into three somewhat messy categories.

•  Consumption Past

•  Consumption Present

•  Consumption Future

Like the three ghosts that visit Scrooge at Christmas, each can be frightening. But let's take a closer look anyway.

--Consumption Past has a way of haunting us. It is the money we've spent but borrowed. It includes the balance on our credit card(s), charge cards at individual stores, personal loans and auto loans. Basically, the money is gone. We've got nothing to show for it. And now we have to pay it back.

Some readers may want to remove car loans from this list. After all, we've got a car to show for our car loans. In fact, unless you pay cash for a car, you really don't have much to show for it. Cars depreciate. Rapidly. Many depreciate faster than the loan is paid off, leaving the car owner "upside-down"--- meaning the loan balance is larger than the value of the car. With many cars leased and still more purchased on long term loans, the brute truth is that most people look more prosperous than they are.

--Consumption Present is exactly what you think. It is what we consume today. It includes our income taxes, our electric, phone, and cable bills, our insurance payments, the checks we write at the supermarket, and the cash that mysteriously disappears within hours of being exposed to a wallet or purse.

  Mortgage payments are in consumption present because they are contractual payments that give us access to shelter. Some part of those payments is consumption future because the mortgage is being paid down. But collectively we're borrowing enough additional money through home equity loans that an increasing amount of our home mortgage payments is consumption present. Let's be conservative and not count any of it as consumption future.

  --Consumption Future is the money we actually save. It's the money we commit to our 401(k) accounts, the money we add to taxable accounts, and the cash value build-up in some life insurance policies. Add it all up and you can get an idea of how long you can go without a paycheck. Just divide everything in your accumulated consumption future accounts by consumption present and you get a rough idea. Your goal should be to accumulate 15 to 25 years of consumption present before you retire.

  If a large portion of your income goes to consumption past, you've got a problem. Here, lenders are a pretty good indictor. If you spend more than 8 percent of your income on consumption past they'll reduce the amount they'll give you for a home mortgage. As I've pointed out in other columns, 8 percent doesn't allow much consumption past. If you earn $75,000 a year, 8 percent amounts to $500 a month. That will allow you to finance a $25,000 car for five years--- but nothing else.

Eventually, we all need to eliminate consumption past. We need to focus on consumption future.

How can you tell if you are in good or bad shape?

Easy. Here are three indicators.

•  Small consumption future. You have a problem. Whatever your age, you need to have some money put aside.

•  Big consumption past.   You have a problem. Trust me, there will be magnificent opportunities to buy for the rest of your life. Most of them will wait.

•  Consumption future greater than consumption past. When the portion of your income devoted to consumption future is larger than the portion of your income spent on consumption past, you are in better shape than most of your neighbors. The more consumption future exceeds consumption past, the better off you are.

It's that simple. No Ph.D. required.

Tuesday: How to use your Consumption Past and mortgage debt to advantage in retirement planning.