The Game Changer

Today’s blog can be a game changer for you, if you allow the full import of its content to sink in and then implement it in the way you handle your finances.

Personal Finances – What we usually do

 

The approach to our personal finances is usually in the sequence illustrated above. We spend from the money we earn. We then decide to save/invest from the residual income, if any. And after years of painfully slow accumulation, if our investments start giving us returns, we promptly reward ourselves with more purchases.

Although our income grows as we gain more experience at our work, achieve seniority, improve our skills and our sphere of influence, it is often closely followed by an increase in our spending, but rarely by a proportional increase in our savings. And the reason is this flawed formula we follow in our personal finances. We try to find savings to invest in the surplus left over from our income after all our expenses are met. And our expenses are ever growing so savings are a constant struggle.

Parkinson’s law takes charge of our personal finances, where expenses expand to consume any increase in income. The investible surplus that could have been created by the increase in income gets consumed by wasteful expenditures, owed largely to our spending habits (refer Road To Riches – Decoding Spending).

Personal Finances – How it should be

 

We should first earmark saving from our income (refer Road To Riches – The Moment of Truth for guidelines for ideal income allocation) and then decide our spending from the residual income. Even here we should be judicious enough to not exhaust the amount in hand, and try to add some more to the ‘investible surplus’.

The Road to Riches truly starts with a correction in our Personal Finances formula, where we start respecting the most scarce of man-made resources, ‘Money’.

When your spouse looks at you and calls you frugal, be rest assured you are on the righteous path. Let spouses compete over who is better at saving money than over who spends more (even if on one another). Incidentally children emulate parents and if they see prudent parents, then without being instructed, they cultivate financial prudence. It is a very important life skill and very difficult to learn.

Don’t get me wrong though. I am not asking you to turn into a miser. Please be comfortable, but not indulgent. One should not feel guilty about living a comfortable life but it will be more rewarding if it is accompanied by a financial cushion of stocks, gold, bonds, real estate and a healthy bank balance. Now, isn’t that a pretty picture?