Money Management Simplified (Part 1)

Last March 23, 2010 I spoke at the Manila Bulletin Job Fair at the Glorieta Activity Center in Makati and in that talk I mentioned how job seekers can stretch their cash while searching for a job. I had a great time that day and I hope that my simple advice will go a long way for those still searching for that career.

In this article, I want to expound on this topic to include not just job seekers but literally everyone who is having a hard time in managing their money. I call this article Money Management Simplified because there are really just a few things you need to know if you really want to manage your money well. Like my experience in the job fair, it is my hope that this article will finally help you in getting to where you want to go faster with just a few key action points to do right now.

First, start with a blank sheet of paper and in the middle, write down how much money you have at this very moment. If you are married, I suggest you do this exercise with your spouse and combine both of your money right now.  Your piece of paper should look like this:

Good, now, I want you to write on top of that number, how much money (and your spouse if applicable) you take home every month. (Take home money is the actual money that comes in every month, whether from a job, a business, an investment, etc.). Your piece of paper should now look something like this:

Okay, now, I want you to write below, your total expenses per month, again, if you are married (and with kids), if you have loan payments, add everything up then right down how much expenses you have every month. Your piece of paper should now look something like this:

Great job! Now, the reason why I asked you to write down these three things is because this will be the simplified framework of how you will manage your money from now on. I want you to imagine that you are a cup of water, your “money right now” is the water level in the cup, your “take home money” is the money “pouring” in to you. Look at the drawing below:

Now, you are a very special cup of water because you have “holes” in your bottom, these holes represent your expenses. So here’s the complete picture below:

So, let’s analyze a bit,

Scenario 1: if my “take home per month” is smaller than my “expenses per month” then my money right now will eventually become zero or in other words, you become “bankrupt”. Yikes!, we don’t want that right. To show you what I mean, let’s go back now to what I asked you to write on that piece of paper.

Ex.

P15,000

P25,000

P30,000

Now here’s the simple money management formula that you will have to do to know if you are managing your money well

Take home/month + Money right now – Expenses / month = a Negative number; or a Positive Number.

In the example above, the formula will produce a Negative number and this is what happens to your money when this happens:

1^st month:

P15,000

+ P25,000

– P30,000

= P10,000

(This is how much money you have left in your bank after the first month)

2^nd month:

P15,000

+P10,000

–P30,000

= -P5,000

(You now don’t have money and you will need to get a loan just to cover your basic expenses. Not good.)

Scenario 2: But what if my “take home per month” is equal to my expenses per month then my money right now will remain at the same level. That’s good, but if you want to have more money, that’s not good enough.

Ex.

P30,000

P25,000

P30,000

In this example, the formula will produce a Positive number that remains the same month in month out and this is what happens to your money when this happens:

1^st month:

P30,000

+ P25,000

– P30,000

= P25,000 still

(This is how much money you have left in your bank after the first month)

2^nd month:

P30,000

+P25,000

–P30,000

= P25,000 still

(Your money remains intact. This is a better result, but not good if you want to have more money.)

Scenario 3: So what if my “take home per month is more than my expenses per month? Then my money right now will start to increase. This scenario is where you want to be. This is where you start to become financially smarter.

Ex.

P40,000

P25,000

P30,000

In this example, the formula will produce a Positive number and this is what happens to your money when this happens:

1^st month:

P40,000

+ P25,000

– P30,000

= P35,000

(You now gained P10,000 more after the first month)

2^nd month:

P40,000

+P35,000

–P30,000

= P45,000

(You gained another P10,000 This is where you want to be, this should now be your goal.)

Click here for Part 2 where I will explain how to get from scenario 1 to scenario 3. By the way, this method of money management is what me and my wife practice day in day out. This is called the “Simple Cashflow Method” which I have simplified even more to get as many of you started in managing your money properly.

Author box:

Mark So is a fervent businessman, forex trader and educator.  He is the Chairman and CEO of Businessmaker Academy—a business, finance and corporate training center.  He is also the Chief Forex Trainer of Forex Club Manila. Mr. So Graduated and is a licensed ECE, however his passion has always been in this order – 1.) Love for his wife and family, 2.) Making Money; and 3.) Teaching others how to make money as well. To read more of Mark’s interesting and life enriching articles you can go to his blog at http://www.markso.wordpress.com You may also email your comments and questions to:   markso@zerocapitalclub.com