Your personal financial equations

Some of you may wonder why our finances are not in great shape and does not seem to improve month after month. Have you ever thought if you could have been focusing on the wrong side of your personal financial health equations?

Your financial equations simply tell you if you are above or underwater in your finances. The most important three are as follows:

1. Income – Expenses = Savings

Income is the common part of any savings equation. However, what is more important is expenses. Are you surprised? If you focus your attention on managing on your expenses on a higher level of consciousness, you can quite immediately increase your savings. Increasing income is possible but it takes time which means waiting for an increment, working 2 jobs or even starting a small business which has a gestation period for results.

2. Returns – Inflation = Real Returns

We are all too obsessed with returns. We check out the best FD rates in town, and queue up for deposits that give slightly better returns than FDs. Many times, our focus moves away from inflation, which is after all an important element in providing you your real returns. So, don’t just chase after raw returns which do not give you a positive return after your personal inflation rates.

3. Asset – Liabilities = Net worth

A commonly used barometer used to rank wealthy individuals is the amount of net worth the individual has - hence the term “high net worth individuals”. Increasing assets and reducing liabilities will surely increase our net worth.

However, if we have limited resources, how much can we do to increase our net worth? One way is to focus on your liabilities – check if you too under geared that you are compromising the growth of your net worth?

Start thinking like a business person – they usually leverage on ‘Using Other People’s Money’ i.e. borrowing prudently to make more money. Think about it.