Happy new year OGs,
Welcome to 2021! It is going to be a great year.
Last year I began writing about the journey to financial freedom and all the tiny little things that need to keep top of mind should we want it. I highlighted the value of compound interest, and I suggested that we analyze our finance as a company would. I emphasized the importance of net income in growing your equity, and I hinted that ambition is a major factor in increasing revenue, and by extension, increasing net income. Another way to increase net income is to shrink expenses, so we concluded the year by exploring some guidelines for spending and performed a stock-taking experiment to understand where we are currently.
Pivoting from where we left off last year, in this post, we will discuss some tips to shrinking your expense bubble.
The first step is taking stock, and we discussed that in detail in my previous post. By taking stock, we get an idea of our current situation, and you should be able to answer the following questions
- Are you in good financial shape or not? Sometimes it is hard to tell without looking back.
- Are you living above your means? In the company called you and analyzing you, I suggested that if net income is less than 20% of your revenue, you cannot grow your assets, and if net income is non-existent or you are borrowing to live your day-to-day life, then you are living above your means.
- Can your expenses and spending habits be optimized?
Remove your net income first!
The next thing to do when thinking about shrinking your expense bubble is to turn the net income calculation on its head.
So instead of
Revenue – Expense = Net Income
Revenue – Net Income = Expense
- Determine what percentage of your revenue you want your net income to be. I recommend about 20% – 40%
- Move that amount into a high-interest saving or investment vehicle, and forget about it.
- Plan your needs according to the remainder. Bottom line, ensure that your expenses are within the bounds of what is left over after saving and investing
Living within the bounds of what is left is easier said than done, but it is possible. Budgeting has proven to be one of the most useful levers in achieving this. It is a step forward from taking stock, and understanding your current financial situation, to controlling what your financial experience should be. Budgeting is a big topic, and I like to keep these posts short, so I will discuss it in more depth in the next post
January is the month of new beginnings. For most people, it is a fresh start. Having a new outlook on life is important at this time of the year, and more importantly, cultivating a new financial habit may be instrumental in shaping 2021, so this is a good time to start. I will love to go on that journey with you, so please subscribe, like and comment.