Archive for April, 2010

In part one of this article, (Click here if you have not yet read it) I explained how to simplify your finances by just completing a few simple exercises on a piece of paper and I explained the three scenarios that you are probably in right now. So let’s continue our discussion right now. If you are currently in Scenario 1, you would want to move up to scenario 2 and scenario 3 immediately right? And if you are in scenario 2, your end goal is to get to scenario 3 as soon as possible.

Well, let’s get started then.  If you are in Scenario 1 (or 2), take a look at the picture below:

So here’s what you do about it. Don’t worry, I’m not going to tell you to just live below your means as this is what 99% of people try to do and still be in this predicament. The real solution is that you must work on the two problems together, not just lower your expenses, but work on increasing your take home. In this article (Part 2) I’m going to teach you how to first fix your spending habits, then in the next article (Part 3) We will tackle how to you start increasing your income.

So let’s talk about expenses first.

As the picture shows, the first thing you need to know is that there are three kinds of expenses.

  1. The Necessary – These are the only necessary expenses any one needs. These are:
  • Food
  • Clothing
  • Shelter
  • Transportation
  • Education (if you have kids)
  • Health Insurance (Phil health should be enough for now)

Regarding insurance, if you must prioritize between life, non-life, or health, then always get health insurance first. At this day and age when health costs are ridiculously expensive, not having this can bankrupt anyone if he/she gets hospitalized for a prolonged period. (If you have Phil health, that is enough for now)

  1. The Bad  – These are expenses that have no value after you have spent your money, I also call them useless expenses. These are:
  • Pleasure Expenses (Eating in fancy restaurants, taking expensive vacations, etc.)
  • Vice Expenses (Smoking, Drinking, Gambling, etc.)
  • Buying Items that cannot be rented out
  • Buying Items that cannot be re-sold at same or higher values.
  • Inexperienced Investing (lack of experience in knowing the difference between a scam and a true investment)
  • Debt / loans used to pay for any of the above expenses
  1. The Good – These are expenses that produce “assets”. Assets are things or experiences that will add to income and your money right now. These are:
  • Learning Expenses (Self-Help / How-To Books, Great Seminars, etc.)
  • Buying Items that can be rented out
  • Buying Items that can be used, re-sold at same or higher values
  • Savings / Time Deposits with built in life insurance policies
  • Experienced Investing
  • Life/Pension Insurance
  • Charity / charitable causes (if you give some to certain charities who really need it, it will come back to you a hundred fold through other means)

Notice that I included Savings, Investing, and Insurance as “expenses” this is because with my method, everything that goes out of your “cup” I treat as an expense. But, in this case, it is a good kind of expense.

Now the next thing you have to do is to make some sacrifices and adjust your spending habits. Reduce the Bad Expenses, Keep the Necessary Expenses, then Increase the Good Expenses

Yes, I know, you are thinking: “Easier said than done” Sure it is, I never said it was going to be easy, but, if you have the right mindset, I’m going to make it fun for you. Ready? This key to be able to do what I call:

Expense Management through “Substitution”

Here’s how it works, on another piece of paper, create a table like below, and write the heading for each column, “Bad”, “Necessary”, and “Good”. Then list down in the bad column all the expenses you have right now that have no value after you spend on them. (Yes, just the Bad Expenses, leave the other 2 columns blank)

Ex.

Bad

Necessary Good
Eating Out
Vacation in a province
Investing in a “get-rich-quick” scam

Good, now cross out at least one (or as many ) of them and put in a “substitute” expense in either the “Necessary” or “Good” Column, like this:

Bad Necessary Good
Eating Out Go to market and cook my own food
Vacation in a province Buy a low cost computer that you can use in business and even rent out
Investing in a get-rich-quick scam Buy a book on how to invest

For me (and my wife), this exercise has already become so natural with us that we automatically filter in our minds any expense that comes our way, we know if it’s a bad, necessary or good expense. But more importantly, we follow the very simple rule that I just explained –We do not indulge in Bad expenses, but we do not hesitate to spend on good ones. If we have a substitute expense for it either in the Necessary or Good expense column, we will always substitute it. Make this a habit and you will see that over time, this will be how your expenses will now look like:

Okay, for now your exercise will be to start managing your expenses by substitution. This time however, I would love to hear from you on what you have done about your finances at this point. Do send me a quick hello by email: markso@zerocapitalclub.com Stay tuned for part 3, because in that article, I will be talking about increasing your Take Home / Month. Which is absolutely essential for you to reach scenario 3.  Good luck and I hope to hear from you soon!

Click here to continue reading
Money management simplified Part 3

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 and his wife Jhoanna Gan-So regularly teach their straff to manage their money responsibly and have created a money coaching club for their employees. If you would like to start a money coaching club for your company, email Mark directly at markso@zerocapitalclub.com. To read more of Mark’s interesting and life enriching articles you can go to his blog at http://www.markso.wordpress.com

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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:

1st month:

P15,000

+ P25,000

– P30,000

= P10,000

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

2nd 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:

1st 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)

2nd 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:

1st month:

P40,000

+ P25,000

– P30,000

= P35,000

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

2nd 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