“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” – James W. Frick

One of the most common questions I ask all my financial counselling session is this – ‘how do you spend your money’? The first things we need to establish is reviewing the cash flow statement. Looking at the expenses gives me a quick look at the financial situation of a person and most of the time, I’m pretty dead on.

The cardinal rule of being wealthy is this – “Spend less than what you earn and invest the difference.” The first and most difficult hurdle is often the spending less part. I’ve always believed that there are only two forms of an expense – its either a need or a want. Lo and behold, most people I know (me included) had a problem having a healthy cash flow are those who have difficulties controlling their ‘want’ expenses. In extreme cases, I’ve witnessed some people bring down their ‘need’ spending just to maintain their ‘wants’ – yikes!

The prudent thing to ensure we will have a healthy cash flow (where inflow of cash is far bigger than its outflow) is for us to be sensible in the way we spend. There’s really nothing wrong in spending on ‘wants’ but when those spending is causing you to have a very unhealthy cash flow or worse, being in debt, it’s time to STOP.

Our income is always finite therefore we must be very wise in the way we spend it. Priorities should be clear, communication between spouses and between children should be open so that everyone in the family will understand about priorities in the family income. I implore parents, specially fathers to take a strong lead role in coming up with a healthy family finance so there will be peace and harmony.

I strongly believe that we have the power to curb our wants. We are all rational and logical – its time our finances reflect our real priorities.

A patient man has great understanding, but a quick-tempered man displays folly. – Proverbs 14:29, NIV

con’t.

I realize that the preceding paragraph (in part 1) shows such a defeatist attitude so let me try to redeem myself and offer some enlightenment on the subject matter.

When prices rise steeply, there are two things we can do to combat the rising prices. The first thing we can do is to earn more. Rising prices is a natural economic reality; one can’t expect prices to remain constant as one can’t expect income to remain constant as well. Assuming inflation is at 5% but your income rose by 8%, you can actually counteract the effects of rising prices and still have some of your income left for you to either spend or save (I urge you to do the later) despite the higher cost. The simplest way to combat rising prices therefore, is to increase your income. I said it was simple, I did not say it is easy. Increase in your income will happen but the question is when? It usually takes time before your income registers some growth. If you are an employee, you will need to wait for a raise and most of the time, those raises happen towards the beginning of the year and that’s assuming your company is profitable. Since it is only April, you will have to wait for many more months before you can get some financial relief from the scorch of high prices. If you are in business, it also takes time for you to realize a higher profit margin – there are way too many variables for you to undertake before you can see an improved bottom line.

While you are waiting for your income to rise, you may want to pay attention to what you spend on. To have a better cash flow, you need to ‘make more money’ and ‘spend less money’. Curbing consumption, in my opinion (as if there are people who actually care to hear my opinion, haha!) is the most sensible way of combating inflation. A closer look at what you spend on and how you spend will be your best bet in battling the mystery of the vanishing purchasing power.  As many personal finance books will inform, as well as finance experts and even those self-proclaimed finance gurus will pontificate that there are two kinds of expenses: needs and wants. When we do try to reduce our spending, we often try to do so by cutting down on some of our needs because cutting down on wants seems to be more difficult. Why? Because spending on wants is pleasurable while spending on needs is a drag! To articulate (my friends say I ‘articulate’ too much) my point — do you know anyone who screams of excitement every time his Meralco bill arrives? If you know anyone who does, please bring him to a doctor and have him checked. On the other hand, do you know people who are ecstatic whenever their favorite store or mall is on a big Sale? I proved my point.  Cutting down on necessary expenses is not the wise thing to do; there is a reason why they are called necessities in the first place. Cutting down on wants, though harrowing to some is the prudent thing to do. I recommend that you list down all your expenses and I mean all – including those branded coffees that seem to be so addicting and those new fancy and costly milk teas everyone seems to be going gaga over lately. Once you have written everything you have expended on, start determining which of those are ‘needs’ and ‘wants’. Don’t try to fool yourself by trying to be coy and justifying your wants and masking them as needs. I once heard someone say that going to a salon is a need because if she does not look really good, she can’t sell enough life insurance, thereby the salon costs are really needs and not wants – yeah that sounds so right (I’m actually attempting to be sarcastic here).

… to be continued.