Biz Maker: Money Management Simplified, Part 2
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By Mark So
In part one of this article (Ed’s note: available at Mark’s blog; please see author box at the end of this article), I explained how to simplify your finances by completing a few simple exercises on a piece of paper and I explained the three scenarios that you are probably in right now. So let’s continue our discussion. If you are currently in Scenario 1, you want to move up to scenario 2 and scenario 3 immediately, right? And if you are in scenario 2, your end goal is to get to scenario 3 as soon as possible.
Well, let’s get started then. If you are in Scenario 1 (or 2), take a look at the picture below:
So here’s what you do about it. Don’t worry, I’m not going to tell you to just live below your means as this is what 99% of people try, yet they still find themselves in the predicament of either having too much expenses or too little take home pay.
The real solution is that you must work on the two problems together, not just lower your expenses, but also work on increasing your take home. In this article (Part 2) I’m going to teach you how to fix your spending habits, then in the next article (Part 3), we will tackle how you can start increasing your income.
So let’s talk about expenses first.
The first thing you need to know is that there are three kinds of expenses.
- The Necessary: These are the only expenses you cannot avoid. These are:
- Education (if you have kids)
- Health insurance (Philhealth should be enough for now)
Regarding insurance, if you must choose from life, non-life, or health, always get health insurance first. In this day and age when health costs are ridiculously expensive, not having this can bankrupt anyone who is hospitalized for a prolonged period. (If you have Philhealth, it’s enough for now.)
- The Bad: These expenses have no value after you have spent your money. I also call them useless expenses. These are:
- Pleasure expenses (Eating in fancy restaurants, taking expensive vacations, etc.)
- Vices (Smoking, drinking, gambling, etc.)
- Items that cannot be rented out
- Items that cannot be resold at the same or a higher value.
- Inexperienced investing (lack of experience in knowing the difference between a scam and a true investment)
- Debt/loans used to pay for any of the above expenses
- The Good: These expenses produce “assets.” Assets are things or experiences that will add to your income and your money right now. These are:
- Learning expenses (self-help/how-to books, great seminars, etc.)
- Items that can be rented out
- Items that can be used then resold at the same or a higher value
- Savings/time deposits with built-in life insurance policies
- Experienced investing
- Life/pension insurance
- Charity (if you give to charities that really need it, it will come back to you a hundredfold through other means)
Notice that I included savings, investing, and insurance as “expenses.” This is because with my method, everything that goes out of your “cup” I treat as an expense. But, in this case, it is a good kind of expense.
Now the next thing you have to do is to make some sacrifices and adjust your spending habits. Reduce the Bad Expenses, keep the Necessary Expenses, then increase the Good Expenses
Yes, I know, you are thinking: “Easier said than done.” Sure it is; I never said it was going to be easy, but, if you have the right mindset, I’m going to make it fun for you. Ready? This is the key to be able to do what I call:
Expense Management through “Substitution”
Here’s how it works. On another piece of paper, create a table like the one below, and write a heading for each column: “Bad,” “Necessary,” and “Good.” Then list down in the “Bad” column all the expenses you have right now that have no value after you spend on them. (Yes, just the Bad Expenses; leave the other two columns blank.)
|Vacation in the province|
|Investing in a “get-rich-quick” scam|
Good, now cross out at least one (or as many as you like) of them and put in a “substitute” expense in either the “Necessary” or “Good” Column, like this:
|Eating out||Go to the market and cook my own food|
|Vacation at a province||Buy a low-cost computer that you can use for business and even rent out|
|Investing in a get-rich-quick scam||Buy a good book on how to invest|
For me (and my wife), this exercise has already become so natural with us that we automatically filter in our minds any expense that comes our way. We know if it’s a Bad, Necessary, or Good expense. But more importantly, we follow the very simple rule that I just explained: we do not indulge in Bad Expenses, but we do not hesitate to spend on Good ones.
If we have a substitute expense for a Bad expense either in the Necessary or Good expense column, we will always substitute it. Make this a habit and you will see that over time, this will be how your expenses will now look like:
Okay, for now your exercise will be to start managing your expenses by substitution. This time however, I would love to hear from you as to what you have done about your finances at this point. Do send me a quick hello by email: firstname.lastname@example.org. Stay tuned for part 3, because in that article, I will be talking about increasing your take home pay per month, which is absolutely essential for you to reach scenario 3. Good luck and I hope to hear from you soon!
About the Author: Mark So is a fervent businessman, forex trader, and educator. He is the chairman and CEO of Businessmaker Academy, a business, finance, and corporate training center. He is also the Chief Forex Trainer of Forex Club Manila. Mr. So and his wife Jhoanna Gan-So regularly teach their straff to manage their money responsibly and have created a money coaching club for their employees. If you would like to start a money coaching club for your company, email Mark directly at marksoATzerocapitalclub.com. To read more of Mark’s interesting and life enriching articles you can go to his blog at http://www.markso.wordpress.com.
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