The Simple Life: Managing Our Living Expenses

I frequent hardwarezone forums and get involved in discussions with the forummers there in the Money section over personal finance and it is interesting to see the questions being asked as it reflected how I too was still learning the ropes of personal finance and managing my hard-earned money.

One of the interesting issues that crops up now and then is financial freedom.

What really is financial freedom?

Different people look at it differently but if you have read some of my earlier posts, I see it as popularised by Robert Kiyosaki, passive income > total expenses. This is not a totally original concept, even Clason had expounded on such concepts in his book, "The Richest Man in Babylon".

My previous post talked about playing the Cash Flow game. I am not endorsing that game but it is one of the few games (the other I heard about is FQ but I have not got a chance to play it) that teaches about personal finance in a relatively fun way.

I played the Cash Flow game twice at Settler's Cafe @ Buona Vista and what the game demonstrated was that even with a low paying job, one could get out of the Rat Race by getting into small deals where finally financial freedom is achieved with passive income > total expenses.

This is a game and some aspects are not practicable but the interesting thing I learn was that we tend to be fixated over the income part of the financial freedom equation. E.g. I would be financially free if I hit $1.5 million TOTO on Thursday (hmmm... remind me to buy TOTO later during lunch..hahaha)

But let's re-examine the paradigm, i.e. if we keeps total expenses low, then we do not need a very high passive income to be financially free.

Hence, we tend to focus on how to get more passive income which is good. But how about focusing on the expense part?

• Can we live a simpler life?
• Can we cook at home on weekends to have nutritious, healthy and value-for-money meals?
• Can we walk, take bus/mrt/taxi instead of getting a car?
• If we need transport can we buy a panel van vs a car?
• Do we blow our bonuses on an overseas trip to Australia or just visit Vietnam instead?

I see financial freedom as an equation and we need to work on both the income and the expenses side. Our daily, weekly, monthly choices in earning, saving and spending makes a lot of difference our overall financial freedom!

Manage our living expenses and we may find ourselves reaching our financial freedom sooner than later!

A dollar saved is a dollar earned

One of the key insights that struck me from reading Robert Kiyosaki's "Rich Dad, Poor Dad" book was changing our paradigm of seeing if that $1 we earn becomes an asset or an expense.

His book does give some interesting perspectives on personal finance though I too, like many critics, do feel that he made his millions from selling his book rather than from his real estate exploits.

The concept is simple: Ask yourself this question - Everytime we earn $1 of our hard-earned pay check, do we channel that $1 into an expense by buying stuff or do we save and invest it in financial assets that generates future cash flows?

I have learnt that one of the keys to early financial security is to curb one's expenses and build up one's financial assets (or reduce one's financial liabilities) with that $1. I mentioned in my earlier post that we need to decide what is the standard of living we desire for ourselves and then set the limit on how much we should spend. All savings should then be channeled into building assets (or clearing liabilities).

What assets can we invest in? Starting from the humble Maybank iSavvy, we are already getting 2.08% on balances exceeding $5,000. Other unexciting but safe instruments such as Treasury Bills or Singapore Government Securities beckon offering rates better than savings accounts in most of the local banks. For the more sophisticated investor, one may wish to punt in the local or even overseas stock markets or park one's funds in a unit trust. There are of course, risks from taking the different investment types but suffice to say we need to get better returns than the pathetic savings rate available now.

Time to change our paradigms... $1 you earn.... What's it going to be? An asset or an expense.

You decide.