005 Three Simple Steps towards Independence

The traditional way of looking at your financial cashflow, if you are an employee, is:

  1. Earn money from your salary, to see a deposit in your Bank account
  2. Spend money out of this Bank account, while trying to spend less than you earn
  3. Save whatever remains in safe instruments (Fixed deposits, Postal certificates, etc.)

In this mode of finance, Savings = Earnings – Expenditure

In other words, “You are saving what is left after spending”

You budget a certain amount for expenses on a monthly basis with the intent to save as possible by end of the month. As month rolls by, there often is some unexpected expense that may derail our plan. You had forgotten that your kid’s school fees were due. Your car had to be serviced or repaired. Your mother was ill and hospitalized for a couple of days. You had to purchase gifts for visiting relatives. Your insurance payments fell due this month. The reason varies every month. Of course, none of these were discretionary expenses, so you did not have the choice of not spending the amount. The end result is, more often than not, that the residue in your account at the end of the month a little smaller than expected.

Now let’s flip this equation. Let’s suppose you adopt the following approach:

  1. Earn money from your salary, to see a deposit in your Bank account
  2. Invest money out of this Bank account systematically in wealth-creating instruments
  3. Spend what remains while tracking, categorizing and accounting for non-monthly expenses

In short, Spending = Earnings – Investments

Or in other words, “You are spending what is left after investing

What can be measured, can be improved. This activity of flipping your perspective ensures:

  1. You are paying for the security of your future self first
  2. You track and forecast expenses, thus being ready with funds for when the payment falls due
  3. You can identify key expenses (monthly or otherwise) and can evaluate the necessity of each spend.

This perspective is crucial to ensure you remain focused on maximizing your investments. If you have wondered why you can never make ends meet, you can isolate the cause and focus on generating the right solutions:

  1. Are you not earning enough? If yes, what can you do to raise your income?
  2. Are you not investing enough for tomorrow? If yes, how do you remove your emotions from the process to prevent you from sabotaging your goals?
  3. Are you spending too much? If yes, what are you spending on and what can you cut down on?

Your specific financial situation may have a tailored response to each of the questions above, and so will the solutions. The overarching focus, however is to:

  1. Maximize your earnings
  2. Maximize your investments
  3. Minimize your spending

The difference between your earnings and spending, and the instruments you invest in, will determine the years you will need to work to achieve financial independence.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s