Surplus - Deficit

 

Remember these formulas?

 

Income - Expenses > 0 = Surplus Cash
Income - Expenses = 0 = You Are In Trouble
Income - Expenses < 0 = You Are In Double Trouble

The secret to achieve Financial Freedom is you must always have surplus cash. That is all there is to it. Nothing complicated. Everybody can do it.

So the first step in this journey is to make sure that you have surplus cash at the end of every month. There are two ways to go about it. Either you increase your income or reduce your expense.

 

You will reach your target faster if you can increase your income and reduce your expense.

How to increase your income?

 

Ask your boss for a raise? It would be fabulous if you can do that! Some of you may be able to do that but most of you most probably can’t.

A few other ways are:

 

• Quit your present job and change to a better paying job
• Do part-time job
• Start a part-time home business
• Improve your skills so that you can be promoted faster

 

I am sure that if your surf the internet you can find more ideas. Just bear in mind that there is no such thing as easy money. Be mindful of scams. If it seems too good to be true then chances are it is.

 

So be very careful. You want to make money not lose money.

Perhaps now is a good time for me to introduce two new concepts.

 

First one is patience. Nobody could and should be rich overnight. It is against the order of the universe. If you don't believe me, ask Bill Gates or Warren Buffett. I am sure they will say the same.

 

People who won lottery, not all of them stayed rich. Some ended-up broke or dead!

Check these stories:
http://newsfeed.time.com/2012/11/28/500-million-powerball-jackpot-the-tragic-stories-of-the-lotterys-unluckiest-winners/
http://www.money.co.uk/article/1002156-how-the-lives-of-10-lottery-millionaires-went-disasterously-wrong.htm

There is a perfectly good reason why people should not turn rich overnight. They won't have the experience to handle their wealth.

 

If you start small and slowly build up from there then by the time you reach your financial target you will be so comfortable in handling your wealth that it is like your second nature.

So be patient and persevere. Nothing is sweeter than the taste of deserved success.

“Patience can be bitter but her fruit is always sweet.”

 - Habeeb Akande

“Success is sweet, but the secret is sweat.”

 - Norman Schwarzkopf

The second concept is delayed gratification.

 

This will enable you to control your expenditure. Instead of buying everything that you want now, attach target to it. For instance, you will only buy the new iPhone if you can increase your savings by 30% in 3 months. The more expensive the reward, the more stretch the target should be.

 

This way all the expensive stuff that you buy will not merely be a vain exercise but each and every one of them will represent your success. Try it. It is gratifying!

How to reduce your expense?

 

From my experience, to reduce your expense is not easy. Most especially when most of your expenses are under fixed category.

 

The easy target is of course your variable expenses. Instead of buying books may be you can borrow them. Instead of buying newspaper maybe you can just read their free online version.

 

There are many sites in the internet that can teach you how to save costs. Do check them out.

Even though it is not going to be easy, you must always try to find opportunities to restructure your fixed expenses.

 

When it comes to your financial well being, it pays to be well informed. Always keep track of the latest development in your big ticket items like housing and car loans. Go to Finance websites and forums once in awhile. They have a lot of good tips.

 

I made a big mistake once and still paying for it now. I didn’t check the forum on time because I was busy with work. By the time I checked, it was too late. That mistake costs me 0.35% p.a. extra in interest expense every year.

 

In percentage term it may not look much but in absolute term, year after year, it is a lot. What to do? You win some you lose some. To stay in the game, just make sure that over the years you win more than you lose!

Whenever you are with your friends besides the juicy gossip stuff, try to talk about finance occasionally.

 

After listening to my friend's story about her loan refinancing escapades, I called my bank. Within a month, my interest rate was reduced. My housing loan restructuring saved me close to $6k a year in interest costs!

Another way to manage your expense is to not let it grow faster than your income growth.

 

If your net income increases by 10%, make sure your expenses maximum expansion is 5%. If you can keep the expansion to 0%, then half the battle has already been won.

By the end of Chapter 3, you should be able to know how much is your monthly cash surplus or (God forbids) deficit.

 

Homework: Devise ways (legally!) to increase your cash surplus and take immediate action. Start with the low-hanging-fruits like stop buying newspapers or reduce your cigarettes intake.

 

Always bear in mind that “procrastination and time are your greatest enemy”.