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There will always be things out there to buy in the modern world. The question to ask is always whether we need these or we want these. The question seems innocent enough at first glance. However, one person's needs might be another person's wants. Do I hear some readers going, "Huh?"
Human beings have various needs for survival. In my mind, at the most basic, we need air, water, food, shelter and clothing. Some might say that the last item is debatable and it might be a want that has become a need due to the evolution of human society which invented the notion of modesty. Here we start to see a blurring in the line separating needs and wants. However, we should have an idea of what are needs and what are wants for us to do a good job of managing our money.
Recently, I was asked how much of my income do I save. Off the top of my head, I said I probably save about 80% of my annual income and that received some incredulous expletives. Is it possible? Yes, it is. How could we achieve this? It is through a combination of increasing our income and reducing our expenses. This post is about the latter.
In business, we very often hear how efforts are being put into increasing revenue. Rarely do we hear how efforts are being put into decreasing costs. Somehow, increasing revenue is more glamorous than decreasing costs. It is when times are bad that businesses start decreasing costs in the hope of preserving their bottomline.
I believe that cost control must always be an important consideration in business. Costs should always be kept low, in good times and bad. This is especially true when we are looking at fixed costs or costs which cannot be adjusted downwards in the short run, at least not without incurring some kind of penalty or monetary loss.
Similarly, in our personal finances, if we keep our living expenses low, we do not have to worry during bad times if our income level takes a dip or, indeed, disappears over a period of time. We would have ample reserves to see us through. In the world of business, these are called retained earnings.
Making money is an important skill in modern society but managing money is an equally important skill and, very often, neglected. We can make a lot of money but we can easily squander it all through mismanagement or, indeed, no management.
Do you believe me if I tell you I know of someone who made $10k a month but spent it all, habitually? Seemingly flying high, he had a really rough landing with a few broken bones thrown in when the wind was taken away from under his wings.
So, what we have to do is to have quite clearly in our minds what are needs to us and what are wants. We should cut back on our expenditure on wants. Sounds simple enough, doesn't it? Maybe not.
As mentioned earlier in this post, the definitions of needs and wants can be quite subjective. We need transportation but do we need to have a car? For a businessman, he probably needs a car. Or, indeed, do we need to take a bus if the destination is only a few stops away? For an old granny, it's probably a need. Defining our needs and wants, this is the tough bit and I leave it to you.
Assuming we manage to sort out our needs and wants, what's next? Once we have amassed some "retained earnings", look at how to put them to good use. It's time to increase our income. A company that is sitting on a lot of cash and not doing anything with it is doing its shareholders a grave injustice. Similarly, just keeping all our wealth as cash in a bank account is doing ourselves a great disservice. That's another subject and if you are interested enough, you might want to read a couple of my earlier posts below. Have a good weekend and I will talk to you again soon.
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Grow your wealth and beat inflation.
Bungee jumping, anyone?
To queue for $1 parking fee redemption.
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