Hey everyone! I am working on a series documenting how I personally started building my wealth hoping to share it with you for your own use. In this post, I will guide you through the first step in managing your finances – and that is knowing your potential! When you talk about potential, it’s usually a future abstract thing that you don’t know what the source of is. But this financial potential is measurable – you can personally identify what the basis is, how much it is, how you can achieve it, and what you will do with it. Isn’t it exciting?
The following steps will require you a lot of self-analysis in order for it to be really effective. I do encourage you to take a quick read at it first, ponder upon it for a while, and when you’re ready, take the time doing it on your own. Whatever you plan on doing it for, this exercise will be worth it.
SOURCES OF FUNDS: Get a feel of how much you are earning periodically over the year.
Check at least your three months’ worth of payslips and take note of how much on the average are you getting after tax and statutory contributions every pay period. This is your disposable income which is available for you to spend or to save as you wish.
For illustration purposes, I’ll share with you my personal assessment of one of my friend’s finances. Let’s call him Friend 2. Friend 2 is a high-performing advertising account executive who has built his expertise through 4 years of experience with different advertising agencies. He’s kind of a big shot earning on the average PHP20,400 every 15th and 30th of the month. His current firm does not give other benefits though so other than that, he only gets the mandatory 13th month pay. He also does not have other sources of income.
|SOURCES OF FUNDS (in PHP)||Per period||Annualized|
|Net pay after tax and contributions:||20,400.00||489,600.00|
|Bonus (13th month onwards, performance, etc.):||40,800.00||40,800.00|
|Other income (annual):||–||–|
USES OF FUNDS: Compute for your average monthly spending on the normal items.
Next, list down your normal monthly expenses. You should be able to get a feel of these for they are the items you usually pay for. Be as extensive as possible in your list; do it under the touch move rule. If you forget to include something, then you can’t spend for it next time! Just kidding.
|USES OF FUNDS (in PHP)||Per period||Annualized|
|Food per day:||400.00||144,000.00|
|Transportation per day:||150.00||54,000.00|
|Rent a month:||2,500.00||30,000.00|
|Grocery for a month:||2,000.00||24,000.00|
|Clothing budget in a month:||2,000.00||24,000.00|
|Hang-out budget in a month:||2,000.00||24,000.00|
|Telecommunication charges a month:||1,000.00||12,000.00|
|Utilities a month:||500.00||6,000.00|
Though he’s earning a considerable amount, Friend 2 is also spending quite a lot. His lifestyle may have also been influenced by his career as he’s always on-the-go, trying out different restaurants, connecting with people through his postpaid mobile, and keeping up with the latest trends. Good thing he’s renting an affordable place near his workplace with his former college friends and that also helps keep the transportation expenses down.
It is important to note that above only include the basic expenses you pay for to keep your life running well. If you feel you have other basic expenses to add, feel free to do so. However, in general, you should exclude your out-of-town trips, your new gadget purchase, or your payment for your brother’s tuition fees. All of these shall be accounted for afterwards and will be discussed more thoroughly in the next parts of this series.
NET FUNDS: Come up with your net funds and re-assess your sources and uses of funds.
This step is basic math. You deduct your uses of funds from your sources of funds and get your net funds. This is your potential savings.
|SOURCES OF FUNDS||– USES OF FUNDS||= NET FUNDS|
|530,400.00||– 318,000.00||= 212,400.00|
Friend 2 has a potential to save PHP212,400.00 in a year; spreading that over the year and he’ll be able to save PHP7,150.00 every pay period plus his PHP40,800 13th month pay.
Now I’ve read a lot of advice from both professional and personal perspectives and one of the things I saw is that the general rule to savings is Income – Savings = Expenses. In what we did above, it is basically Income – Expenses = Savings. The reasoning behind the first formula is you need to prioritize saving first and what is left after that should be how much you’ll spend. I’d like to disagree with that though since it is difficult to commit to a certain amount of savings without first managing how you’ll be able to pay the bills. Save too much and you’ll neglect spending for yourself, ending up rich but deprived. On the other hand, save too little and you’ll splurge on your daily expenses, ending up not maximizing your potential to grow your wealth.
Like many other things, managing your finances requires you to know yourself well. By doing the above exercise, you’ll see how funds are coming in for you, how much of it goes to your daily expenses, and how much you can allocate to other things. The net funds or potential savings identified above may not all go to your wealth. You will dictate how much of it will be spent on travels, family commitments, personal projects, and other things that will enrich your life. You will also dictate how much of it you will keep in the bank or in investments to have an available pool for emergencies, for your long-term plans, and for your eventual retirement. All of these shall be discussed in the next parts of this series, but for now, I hope you got some nice insights through this activity.