Personal Finance – Understanding Personal Income and Expenditure

“It takes as much imagination to create debt as to create income” quote attributed to Leonard Orr; if this is the case, then why is it that we create debts more easily than an income? well, most of us do, I know I do… I work so hard to create my income but on the contrary I easily get into debts.

In the last 5 years I have found myself getting into more and more debts, the more debts I get, the easier it gets for me to get to the next one and the next. My bank does not help either, the more debts I have, the higher the borrowing rates I am banded in, I guess it is because I am considered as a high risk to the bank.

Then there is overdraft charges, bounced direct debit charges, checks, late payments on my loans, utilities, mortgages all compounding into increasing my debt thus lowering my credit score and consequently increasing my APR… my debts feels like snow ball, free falling from a hill getting bigger by second, getting more and more out of control.

I took upon myself to look back at how I got into debts in the first instance; I knew if I have any chance of regaining control of my finance, I will have to know how I got in. It pays to understand how one gets into debt, and to do so, understanding income and expenditure is important.

Income is any earning that lands at your disposal, it may be money earned through paid employment, as business profit, or from investments. Expenditure (or sometimes known as expenses) is any transaction that takes away your earnings, for instance paying bills, mortgage, loans etc.

Income and expenditure chart, table or write up, (also known as cash flow) is a snap-shot of your earnings versus expenses. It is in essence looking at what you earnings (income), usually monthly against expenses (outgoing). An average person would not bother writing down his/her cash flow.

Using cash flow, it is easy to see how one gets into debt. When income is lower than expenses (also known as negative cash flow), the shortfall (deficit) has to be covered somehow from somewhere and for most of us it is covered by borrowing (loan, credit cards, store cards).

I began to learn that, if I am to avoid getting into debt, I will have to “live within my means”, i.e. at least break even between my income and my outgoing. To do this, I needed to master my will, guts and learn not to be ashamed of where I was, financially.

Most of the time, the pressure of conforming to other people’s expectations (keeping up with Joneses) is the one that gets us to live beyond our means, thus getting into debts. What we don’t understand is, debts have crippling effects and they are addictive in nature.

Robert Kiyosaki, in his book Cash Flow Quadrant (2000, p205) rightly said, “people who cannot control their cash flow work for those who can”; if we are to become free, we have to learn to control our cash flow and this begins by WRITING DOWN monthly cash flow account (personal income and expenses account)… it is surprising how those unplanned £5 expenses quickly adds up to £100’s plunging one down into ‘negative cash flow’.

The aim is to take control of the personal cash flow with the objective of creating income higher than expenses, positive cash flow (surplus) and use the surplus to get out of debt, invest to create more surplus and of course to ‘spend’ on pleasure. My personal motto is: “live within my means, then increase my means”, for pleasure, use surplus only… thus, no surplus, no pleasure.

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