I know a lot of us are employees working for a company and struggling hard to survive on our paychecks. I belong to that category. When that paycheck comes, a lot of us spend it from paying our bills to treating ourselves like buying gadgets and other entertainment wants.
If we want to achieve our financial goals, then we must start to save as early as possible. And that is NOW! The earlier we started our savings attitude, the more possible we can achieve our financial goals.
We are used with this equation, INCOME – EXPENSE = SAVINGS. This is the scenario given above. As long as we received our paychecks, we spend it on a lot of ways. Whatever left from our expenses is our savings. I always believe in the concept of ‘delayed gratification’. That is, we delay our satisfaction in order to prepare for a future goal.
And this is where we need to save wisely. We need to arrange our equation. Instead of the equation written above, why not use INCOME – SAVINGS = EXPENSE. In this scenario, we pay ourselves first more than anything else. Each time we received our paychecks, we set aside a portion of it to our savings. We treat SAVINGS as an EXPENSE. Why?
Because Savings is the most important of all expenses since it buys the most important thing – YOUR FUTURE.
As Warren Buffet said: “Do not save what is left after spending, but spend what is left after saving.” If we view ourselves as a corporation, then a corporation must have a plan and budget for expenses. What is the first priority expense of a corporation? Yes, it is the payroll of employees. If you agree with this, your first priority should be “paying yourself first” because you are the sole employee of your own company. Paying yourself, in this instance, means compensating yourself for the use of an income-generating asset which is yourself. This compensation is your savings. Thus your income must first be reduced by your savings. What is left after will then be available for your living expenses.
Now, the question is how much should go into savings? This is where I will turn you to Pareto’s Principle or more commonly known as the Principle of 80/20. Ideally, it states that, for many events, roughly 80% of the effects come from 20% of the causes. When applied in savings, we should then need, ideally to set aside a minimum of 20% of our salary.
Now, you might ask how could you do that if you have a lot of expenses? You need to become frugal. Learn to budget and live below your means. For more of that, you can browse any of my articles under savings.
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- INCOME MINUS SAVINGS EQUALS EXPENSES explanation
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