Quite a number of people asked me how I managed to save in such disciplined manner. The equation of saving never changes:
Savings = Income - Expenses. You can either increase your income, decrease your expenses or do both at the same time. I prefer the first method of increasing your income, because seriously how much can you cut from your expenses? There will be a limit to the numbers of needs that you can convince yourself to change to a want, and the flow of life will just increase your expenses especially once you have a family. As mentioned in a
previous post, I estimated that you need roughly $2,650 expenses to have a comfortable life. Let's say you don't intend to have such a comfortable life and cut it down to $1,500. If you're earning 2k per month, I'll still say it's hard to save a lot by cutting expenses. The better way is still to see how you can increase your income instead.
But the purpose of the post here is not to give ways on how you can increase your income. Everyone's talents and strengths (and chances) are different, so you got to be self-aware of what you can do. If you're good in sports, maybe can you teach swimming on weekends to earn some extra bit. If you have excellent skills in bakery, perhaps you can sell some to neighbors and take orders during festivals. The point is that there's always something you can do if you put your mind to it.
The best way is to monetize things that you do habitually into an income stream. You think about it.
I believe that if you do not know where you stand now, it's hard to set a suitable goal forward. I feel very uneasy when I asked these few questions to myself:
1. How much do I spend on food per month?
2. Out of the food expenses, how much did I spend it on restaurants?
3. How much do I spend on transportation?
4. Out of the transportation expenses, how much did I use it on cabs?
And questions like that. It makes me uneasy because from the money that I earned, I have no idea where it went to. I lead a very blurry life between 2003 to 2007 because I have no idea where my income goes to. At the end of the month, it seems like the money I get 'disappears' and I looked forward to the next paycheck. When I do have a sum of money, I will feel rich and buy myself something expensive to reward myself for the work well done. This goes on for years and despite working hard, I've nothing to show for in my bank account.
I felt increasingly uneasy until I finally took action to remedy it. The very first thing I did is to sort out how much money and assets that I have right now. In other words, I need to find out my net worth - how much assets I have and how much debts I owe. Since I do not have any debts at that time, it's just a matter of adding up the amount that I have in all my bank accounts, money in the money market fund, net value of my stock investments, cash surrender values of my whole life plans and CPF. I put it in an excel spreadsheet to see the changes from month to month so that I know to a great amount of accuracy (it's not 100% for sure, there will be some 'losses' but that's okay) where my money is sitting at the end of every month.
After doing up my net worth, I proceeded on to the monumental task of constructing my cash flow statement. In my line of work, my booked earnings is divorced from the cash that I actually get per month. This means that on one spreadsheet, I've to record down how much work I did on that month and on another spreadsheet, I've to record the actual amount of cash that I received. I also started recording my expenses to have an idea of how much I spend. I'm detailed in my recordings, because I would put in the amount that I spend and the categorized item (e.g. food, transport, parents, insurance etc) with a short comment. So if I spent $50 at Tony Roma's restaurant alone, I would put it under 'Food' catergory, with the comment "Tony Roma - alone". This is to track my expenses so that I know how much I spend on what at the end of each month.
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Now isn't that very similar to companies too, where they have their earned revenues and cash flow statements? I thought it's the very same thing and started thinking of myself as a company and I'm the CEO of myself. I started doing this networth, cashflow, income statements after reading intensively about financial accounting to jumpstart my interest on investing as opposed to trading.
Once all my 3 personal statements are up, I really sat down and started analyzing what went wrong with this 'company'.
Why is it that I can make an income every month but at the end of 4 years, I've nothing much to show in my bank accounts? Now here is where the expenses can come in very handily. I think by looking at the cold hard facts of your expenses per month, you can see where all the leakages are in all its glory details. Perhaps you've been spending too much on drinks, perhaps you've been buying too many clothes, perhaps you've been ebaying too much.
This fact finding exercise will remove all traces of faulty mental accounting that we will do all the time. Oh, I got a bonus this month so it's okay if I spend it on this plasma tv. Oh, I got some trading profits, it's enough to offset some losses I had and the change can be used to buy a new gadget. Some mentioned that this detailed tracking is too much for them...well, I would say it depends on how much and how desperate you want to know. I did a very detailed account of close to 6 months before doing a less detailed one from now onwards because I already know my spending pattern. The interesting thing is that initially I wanted to do it for only 3 months to have an idea but eventually it became such a habit that I extended the 'trial' for almost 2 years now.
I think after the fact finding exercises to determine where you stand currently, a plan to remedy it should already be materializing in your mind now. If you have the discipline to write down your all your expenses for 3 months and above, carrying out the plan to change your spending pattern should be a walk in the park. I think most people would give up on the expenditure recording part.
I came to the realization that I am not spending a lot of money on myself, and most of my expenditures are actually on three things - food, transportation and parents. Hence to limit my expenditures would be foolhardy, because there is a limit to how much I can cut. The only way forward to improve the financial health of me as the company, is to increase my topline - my earnings. I also realised that I can afford the little things here and there to reward myself (as I've always suspected, I'm a very horrible slavedriver to myself). I can well afford it and I should do it so that I can stay longer in this game. Having a very concrete understanding of my financial circumstances, I also made a few plans to have a merger & acquisition exercise towards the end of this month, an acquisition on property towards middle of next year and perhaps spinoff a new company (or two) in about 2 years time. All these need huge capital expenses and being a private company, I can't sell shares to the public at all. So what do I have to do?
The plan is easy enough though the execution is not at all. Just bloody save 50k per year for 2-3 yrs. There you have it - the method (work and save), the motivation (preparation of life's milestones) and the killer (me).
To summarise this very lengthy post:
1. Have an idea on where you stand financially at this moment
- Do up your net worth and cash flow, including the expenditure statements
2. Analyze your statements
- See where the leaks are and how to remedy them
3. Set progressive goals
- Set action plans on how to reach these goals