This is going to be a series of blogs on our relationship with and the rules of money.
So today well touch the basics needed to understand money. A sor of rules of the game. Its always easier to play when you know the rules, understand the rules and internalise the rules. The last bit of internalising rules is whats missing in today’s society.
All of us will know the things that i am going to talk about, we understand most of them, but we usually don’t internalise them. That’s what places us at such a disadvantage. Managing your finances(money) is not rocket science. But most of the time we have to think long and hard whenever we talk anything related to finance.
Internalising the rules of money (fiance) helps our brains make the decisions on an almost automatic level. This reduces the fatigue that the brain feels and reduces the chances of us postponing the decisions we need to make. But enough philosophy. Let’s get into more philosophy
Lets start understanding our money world with 2 concepts:
Income: for simplicity this is any form of money coming in. Your salary, your interest from savings accounts, Fixed Deposits(FD), Dividends from stocks. Whatever will increase your bank baalnce comes here.
Expenses: These are things that you need to spend money on. Rent, food, Clothing, fuel, maintenance etc. Anything that causes your bank balance to reduce comes here
Income and expenses define how your money life looks like at the simplest level. Its kind of like a weighing scale. So lets take 3 scenarios to discuss the interplay between income and expenses.
1. Income < Expenses (Income is less than your expenses)
This is how most of us start our fiancnail lives. If you were a business, you’d be filing for bankruptcy very soon (unless you’re a new-fangled start-up, then you can burn cash for a long time). In this situation your burning up somebody else’s cash. Form 0 to whenever we start working our parents fund these expenses. But if your and adult and your in this situation you need to take some drastic action. Most countries in the world run like this they call it a deficit budget according to be it’s a very risky game and a slippery slope into oblivion.
2. Income = Expenses (Income is equal to Expenses)
Your income is equal to your expenses. Here’s how most of the world lives, this is living pay check to pay check. At the end of the month there’s nothing left in the kitty. If you are in this situation. THIS IS AN EMERGENCY. And I kid you not. If there’s anything that happens to your income your finished. Try and get yourself out of this situation ASAP.
3. Income > Expenses (Income is greater than your expenses)
Aha your making more money than your spending. You’re a good lad you are. When income is greater than expenses the sun is shining your making hay and here’s the opportunity for adding a new concept. SAVINGS. The excess cash you have after accounting for all your expenses is your savings. This is where you want to be if you want to get to FI ever. If you’re not in this place FI is impossible. Unless someone’s left you a shit load of money and if they had you’d certainly not be reading this blog.
Lets internalise this bit of the lesson today. We want to have income that’s greater than our expenses. There are 2 ways to attack the problem if you’re in case 1 or 2. Increase income or reduce expenses. In my experience when your starting of. We have a ton of wasteful expenses that we don’t really need. Its easier to identify and attack / address those before we start looking at means of increasing our income. But hey I might be wrong about this. You can take a call on this.