The Equation to Financial Freedom

The Financial Equation to Financial Freedom is:

            Income – Savings = Expenditures

But most of us have gotten used to this equation:

             Income – Expenditures = Savings

The two equations are not the same.  The first one aims to save an X amount before spending anything while the latter tells you that whatever is left of your expenditures becomes expenses. 

The former commands you to have a goal.  “How much do you want to save this year?”, for example.  But you also have to work on realistic financial goals.  It may be realistic to save PhP15,000 when your income is PhP20,000.  But you also have to note of your living expenses:  food, transportation, bills, etc.  Knowing all these in mind, will PhP15,000 be realistic?

To aid in determining your budget, it may help to write down the expenses that you necessarily spend monthy.  The following is an example:

Bills:                       Electricity

                                Water

                                Phone (PLDT, Cellular phone bill)

Food:                    Grocery

                                Drinking Water

Transportation: Gasoline/ Fare

Miscellaneous/ Irregular Expenses

Then write down an average of your spending in order to come up with your TOTAL MONTHLY EXPENDITURES. 

Now, calculate your realistic savings by:  NET INCOME – TOTAL MONTHLY EXPENDITURES

Now, you have an idea of how much you are supposed to save monthly.   Then assess, will this be enough?  Do you need to earn/ save more?

If the answer to questions  imply that you may need to save more, you may need to adjust whatever is flexible in your budget.   This means, you cannot do anything about your cellular phone bill for example as there is a minimum payment required every month.  But maybe you can adjust your food budget by preparing your “baon” everyday.

If after the adjustments you have assessed that your savings are not enough, then maybe it is time to look for another source of income.