Income – ____________ = _____________
(a) Savings, Expenses
(b) Expenses, Savings
The answer for prudent financial management is (a). However, many people follow option (b) in their daily lives as it’s “easier”. If one wants to take control of their financial life, one should always save part of their income first when you get it and spend the rest and not the other way around. This is called “paying yourself first” and is espoused by many self-made millionaires!
“Paying yourself first” works as such: You channel a certain percentage of your income to another bank account every month without fail and this money should not be used unless it’s for investment or emergency. This bank account should not have a credit card, ATM card or cheque book linked to it. This deters you from spending the money. It’s wise to save 10% of your income every month. The more, the better (DUH!). If 10% is a lot for a start, you can start with 1% for 3 months, then raise it to 4% for the next 4 months, then 6% for the next 5 months and finally to 10% from there onwards.
Let’s say you earn $3,000 per month. You save $300 or 10% of your income. Your expenses should fall within the rest, which is $2,700. If your expenses are rising, you should look to curb it by cutting down on unnecessary spending. For example, you can always do without daily dose of Starbucks coffee. 3-in-1 coffee will do the same wonders since it’s all in the mind (reminds you of NS days, eh?). For added effect, you can always purchase a Starbucks mug and drink your 3-in-1 coffee out of it. It also helps if you keep track of your daily expenditures in an Excel spreadsheet or using an iphone app so that you can know where you can cut down your unnecessary expenditures on. Always spend within what you have left after savings.
If you need to buy something that will overshoot your budget, always think if you really need it. Can you do without the latest gadget? Delaying gratification can do wonders in the long run! I read a very informative article in Newsweek magazine two weeks ago about a new research on why people spend excessively and how to reduce this tendency. It’s a highly recommended read and fortunately for you readers, I found the full article online at the Daily Beast website. I also did a post on delaying gratification previously.
Thus, by “paying yourself first”, by cutting your unnecessary expenditures and by delaying gratification, you can at least sleep peacefully every night with a sound financial life!