In this blog we will highlight the meaning of three most fundamental and crucial variables that even a person with little or no knowledge of finance can manage to become financially independent. Proper control over these three variables can change the financial well being and make any individual rich if proper management and control is exercised over these important aspects of personal finance. We will be covering the entire genre of personal finance with a systematic approach in this series of blogs covering the entire spectrum and will enable our readers take their finances to the next level.
We will use the data centric approach to give our readers a complete understanding of what they should do in order to increase their potential of growing financially. We would also be focusing on the strategies and techniques to understand how any individual can manage these crucial aspects and use various management concepts to exponentially grow their wealth over time.
So let us understand these three most familiar terms in personal finance:
Income
A simple way to define income is what is earned or received in a given period. Now in this definition let’s focus on the words “earned or received”.
Deciding factors for Income management
If we just ask ourselves three fundamental questions which are –
- What are various ways in which I can earn or receive income?
- Why I am finding these ways to earn or receive income or we can ask what is my goal for finding these ways to generate or receive income?
- How I will be able to generate multiple income streams, that is what kind of knowledge I require or what are the skills I need to acquire?
If you are able answer these three fundamental questions you have done half the work you need to do in order to amplify your income. Answering these questions will give you a clarity on what you need to do, how you will do it and why are you doing it. For example, your goal can be to be a successful businessman, generate wealth beyond your imagination or to generate a passive income source while you relax a particular domain or field where you can plan to be the next big thing. And trust me no one wants to die poor, the only difference people who excel and people who don’t is strategic planning and flawless execution.
How to get things done?
Developing new skill sets takes time, dedication, effort and money. A comprehensive and exhaustive analysis is the key factor in deciding how far you will go and how much stable your income streams will be in future to support your expansion and investment needs. No matter how you are earning income today your income of tomorrow depends solely on your choice of action in selecting what you will be learning and doing for a given period decided by you and in what domain or field you will be moving into once your goal for a given time is accomplished.
Staying ahead of the curve in Income management
“People who fail to plan have actually planned to fail”. Your planning should be through and flexible enough as well in order to adapt to future trends in the market. People who transition early right at the beginning of any upcoming trend will always have the first movers’ advantage and will reap much greater benefits than the people who are following the trend, so one should always be aware in which market a new trend can emerge to gain the advantage of being in the few percentages of people who started early with the trend.
Any individual who is good in planning, executing and changing his plans as per the needs of the market will always have an edge over others in generating income various streams for himself.
Saving
Saving means putting some money aside gradually for a period of time to cater your goals or emergencies. Concept of saving can be understood from the concept of scarcity which means that we all have limited resources and unlimited needs and all those cannot be dealt instantaneously.
I personally view saving as a habit of systematically planning for your goals and a failsafe mechanism for emergency situations. Savings generally come from the income you have, so more you earn more you can save and more prepared you can for your future goals and emergencies. Saving is the only controllable factor in financial planning for beginners as you have control over what you earn.
Again, savings can be done in a systematic and planned ways, but I personally prefer the art of asking the right set of questions to reach a conclusion for savings as well. You can define the right set of questions to design and develop a saving mechanism for you. These questions can be:
- What are your projected future needs long term and short term?
- How much amount you can allocate each month towards these defined needs?
- What are various ways in which you can save?
Why it is Important?
The habit of saving can help you in developing a discipline and can motivate you for your future goals. The importance of saving cannot be overlooked as it is serves as an ultimate failsafe mechanism in times of financial, medical and personal emergencies.
The habit of saving requires prioritization of your needs which in turn can help you in deciding what are the most important expenses that you should spend your money on and what are the expenses that you avoid.
Crucial variables for saving management
The art of saving money does not require you to live a life a miser but it focuses on the fact that you should spend your money on what you need not on what you want. We all have basic needs like food, clothing, shelter, education, health, entertainment etc. Again, you can ask relevant questions about these various needs like:
- What percentage of my income will cover these basic needs?
- How much optimum amount should I allocate towards each of these basic expenses?
- What are various ways in which I can optimize for each of these expenses.
You will see gradual increase in the amount you save each month if you are tracking your monthly expenses and projecting your upcoming expenses in advance each month. By optimizing these variables, you can become proficient in income management.
Finally, the most important element is discipline in execution you can plan various strategies to increase your income and saving but you will only be able achieve your goals if you are disciplined in your execution. Remember Rome was not built in a day and great things do take time.
