Manage your Finance
– Part One –
This is a two part series that tackles your personal finance. For Part One, I’ll introduce the basic cash flow and for Part Two, the discussion about Assets and Liabilities.
When I was around 6 years old, I picked a 25 centavos (lost by someone presumably) on the streets in Philippines. Being young back then, my only thought was “What can I buy for this amount?” You can safely assume I had the simplest grasp of Purchasing Power.
But my young and intuitive mind didn’t stop there. I began saving and putting my money in the bank for safekeeping. It was only then I realised that my money isn’t growing much, because everything I saved was solely dependent on my parents’ allowance, and the Red envelope (红包 part of my Chinese culture) I receive during holidays.
My dad then introduced time deposit or a bond. It has a higher interest rate than an ordinary savings account but the catch is, your savings will be tied for a certain period of time. In a nutshell, you can’t withdraw your money until the time had expired. I took the plunge and availed the one-year time deposit. After all, it is money working to make more money.
While it isn’t rocket science to understand finance, it’s baffling how a lot of our men out there are in debt. In America alone, an estimated forty-three percent spend more than what they earn. Why? Lifestyle Inflation can explain a portion of this but not all.
“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule no. 1.”
So, without further ado, let’s start with the basics on managing your finance.
If you are a working professional, say a Programmer. You work eight hours a day, five days a week, then receive a fixed salary each month. Assuming of course you are not prostituting yourself during the weekends (pun intended), the salary you receive is your primary source of income.
This simple chart below shows how your cash flow should be. Mind you, cash flow doesn’t only work for big businesses or corporations, it works as well for your finance.
After you receive your income (after taxation), you put it on your savings account, all of it. Once it is there, you then allocate a budget for your expenses such as rent, bills, transportation since these are constant.
There are two benefits in doing this. For one, you get to control your expenditures, the other is you get to build the habit of saving. By having your expenses set to a minimum, you can get more financial flexibility. And while isn’t much, the long term effect is awfully rewarding.
In most cases, people are tempted to use the money to buy expensive things once they receive it. Such action is attributed to Keeping up with the Joneses. As a result, the money which could be saved and used for more important needs disappears for things which fulfils temporary gratification.
“The only way to permanently change the temperature in the room is to reset the thermostat. In the same way, the only way to change your level of financial success ‘permanently’ is to reset your financial thermostat. But it is your choice whether you choose to change.”
—T. Harv Eker
By the time you’ve accumulated enough savings, you can then use it to buy more assets that can generate another source of income. This will be discussing this in Part Two.