Most People Make This Big Mistake! - Financial Freedom Episode #4
Miscalculating your surplus is very dangerous when it comes to creating your financial freedom! Make sure to do it right!
Surplus
A surplus simply means there is something left over. In our case we are talking about monthly income, so if you earn $2000, spend $1800 your surplus would be $200. We all know what happens when the surplus is negative, you lose money every month and eventually you will go broke or bankrupt.
Mistakes
Most people I talk to about their financial situation believe they have a surplus, where in reality they don't. Have look at the table below. This table is of course simplified we are not taking into account all costs and also no inflation and interest rates etc. Let's keep it simple guys:
| Monthly Expenditure | Wrong Calculation of Surplus | Correct Calculation |
|---|---|---|
| Income | $3000 | $3000 |
| Rent | $1200 | $1200 |
| Car | $400 | $400 |
| Food | $300 | $300 |
| Clothes | $200 | $200 |
| Fun | $350 | $350 |
| Supposed Surplus | $550 | Uhh, wait??? |
| Vacation | $200 | $200 |
| Repairs | $50 | $50 |
| Taxes & Insurance | $200 | $200 |
| Christmas Presents | $20 | $20 |
| Real Surplus | $80 | $80 |
The Problem
One of the biggest errors people make is to not account for yearly costs. People may put some money aside, and therefore think they are 'saving' $500 a month whereas in reality that money is already spent. It's spent on future expected expenses. This can be a vacation, or saving up for Christmas presents as well as council taxes or yearly insurance fees. Maybe the car breaks down who knows.
How It Should Be Done
I want you to calculate the REAL amount you're saving every year, which you are not going to spend on anything but investments. The money you save every month or every year that you put in a savings account, not for your pension, not your 401K, savings account which you are planning to use within maybe 2-4 years to invest. If the amount is $0 don't worry, we will work on getting that up soon enough. You do need to know however exactly how much that is. And if you're not doing it, you need to start doing it.
Increase Your Surplus
Increasing a surplus is very easy. For instance in the example above, in order to triple the surplus all we need to do is go from $80 a month to $240 a month. That's 300% growth on the current surplus in the example. We can cut, by spending less, or increase the income. The easiest thing to do appears to be cutting, however keep in mind, the total expenditure is $2920 so we can only every increase the surplus with that amount by cutting. It's a good start though. So, spend $20 less on clothes, $40 less on fun and maybe $100 less on a car. BOOM! We reached the goal.
Increasing Income
It would however be even easier to increase the income. In a 40 hour work week you work 160 hours a month on average. Increase your hourly wage with just $1 and you have tripled your investment savings every month (again in the above mentioned example). If you cut and increase you go from $80 to $400!!!
Another thing you could do is, since you are earning $18.75 per hour with this income, simply work 8 hours a month more. That is 1 day per month, and BOOM you're there. What if you work 1 more day a month, ask for a pay raise and save some money? You will now have an actual surplus of $558. That's almost times 7 with hardly any extra work!
Power of Surplus
Since most people have a very small surplus it is extremely easy to multiply it. You see, if your expenses stay the same, and your hourly wage rises just 2% - 3% you could already double your surplus easily, if it was small to begin with. A surplus of around $400 - $500 amounts to quite a lot of money that is ready to be invested at the end of the year.
I'm currently aiming to have 40%of my monthly income saved into my investment account. Therefore if I would earn $5000 a month my surplus would have to be $2000 and my expenses $3000 at the most.
Now that investment account is building up nicely, we will need to learn some more about what to do with it!
Stay tuned!
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thanks @transparencybot. I hadn't noticed it was more than $50 stu. I wanna keep it a lot lower actually :)
It can really vary depending on the steem and SBD exchange rate, but very glad to hear you are wanting to stay under $50.00.
Much success!
Thanks! @transparencybot :)
Congratulation markdeheide! Your post has appeared on the hot page after 22min with 12 votes.
Ah nice! :)
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Brought to you by @tts. If you find it useful please consider upvote this reply.
@tts Thanks! :)
I will try to learn how to set aside money to use in the future, after I read this article, thank you.
You're most welcome @novian2012
That is important know, get you to protect your money with spend it in things not important
@lect1 Thanks glad to hear you liked the post! :)
Save to invest not save for future expenses... Ton of value @markdeheide.
Yes @micscrpt ;) very important to do both actually :)
Yes, it is. Only if the expense is justifiable. What do you think?
Well how would you qualify the justifiability? :)
If the point is to acquire more depreciating assets that are not really needed, then it's not worth it. I do get travel (which is great for personal growth but in moderation and within reason)
Yes, well just acquiring depreciating assets you never or hardly use is definitely a waste of money and resources in my opinion. :)
we are on the same page
Great post - I finally implemented saving for yearly costs this year by setting up a savings account as essentially an escrow for myself.
If my yearly costs were say $1200, then I would transfer $100/month to this account so I am able to handle the yearly costs once they are due.
Examples of these costs are credit card annual fees, Amazon Prime, car insurance etc.
Thanks @jdh7190 great to hear you do this :) If you want to be more advanced in savings and investing you can also time your investments according to these yearly payments, and contact the companies to arrange all payments to be in the same month so you don't have to loose out on potential interest gains ;)
I'm constantly telling my children, "You don't save money just to spend it later. You save money to put it to work to make more." They're still young, but they're starting to understand. You don't need to make a lot of money to save enough to make money from it either. It just takes time, and the less you spend the easier it is. The less you spend, the faster your wealth grows as well. You just need discipline.
@finnian yes! It is a little bit of discipline right now (okay well for some people a lot) but it really doesn't take that much. Even if you would want to invest in some real estate, you may need $30.000 - $40.000 to get started. That is really doable. Especially if you team up with a brother or sister, or maybe very good and trusted friend :)
What would you recommend to your children career and finances wise? I've always told them to learn economics, a trade, a professional (the trade and professional being related helps), and at least a second language. Would you add or change anything in that formula to assure their success? This is beyond the basics of saving to put wealth to work of course. Thanks in advance!
I would simply teach them my basic philosophy about financial freedom. And assure that they learn about what is of interest to them. A second language can be helpful depending on where you live. I don't really care about economics myself. Economics is based on macro levels and has little or nothing to do with personal finance. However I would teach them about money of course. :)
Most importantly I would learn them about success in their personal lives, based on their own values, not on pre-scribed values dictated by society.