With coronavirus pandemic numbers decreasing daily, we need to make sure that after this pandemic ends, we have learned a thing or two. Since some of us had to make some financial sacrifices due to some job changes; salary reductions or even – God forbids – layoffs; one of the things that we by now should be able to do is managing our finances.
For that, in this article, I will talk about how the majority of people manage their money and how those natural-born-budget-makers do.
Problem
Let’s start with how the majority of people manage their finances. You usually get your salary at the beginning of the month, set aside an amount of money for food and drinks, bills, supposedly entertainment, and health emergencies if you lived by yourself. If you are married, these expenses would be doubled. If you are married with kids, you could end up tripling or quadrupling, adding to them the school fees, if your kids are that age. At least, this sort of planning is what you know you should do.
Instead, most people once they get their salary and see or hear of something they want to buy, they either just do; I mean how hard is it these days to buy something that you’ve seen online? This momentary happiness is literally 3 to 5 clicks away.
Or, they beat themselves up because of all the financial responsibilities that restrain them from getting this momentary happiness.
A step back
Well, before we talk about how the natural budgeters make sure they don’t end the month with a negative balance or are indebted to anyone, let’s take a step back and revise some definitions that will help you understand the juicy parts of this article and consequently, hopefully, have a better financial life. I know you may already be familiar with most of these terms, but practice makes perfect.
Gross salary:
Let’s start with the basics, the gross salary is the total amount of money you get from your company before any deductions.
Net salary:
The net salary is the sum of money you actually get after all deductions are applied to your salary. The deductions can vary from insurance benefits to health benefits, etc.
Revenue or Income:
Income is the total amount of money you make, whether hourly like translators, monthly like most people, or annually like football players. Since we talked about income, we must explain that it has two types.
Active Income:
This is the kind of income that gets generated when you do something. If you stop doing what you do, you don’t get this income. The most famous example of an active income generator is a job.
Passive income:
This concept is not familiar to most people. It’s mentioned in the best-selling book titled “Rich Dad, Poor Dad”, which we will cover in this article, and it’s kind of the opposite of the previous one. It’s the kind of income that gets generated without having to do “continuous” work, so if you stop, it will still be generating money.
Expenses:
This is the money you spend basically. They vary from necessities or needs to luxuries or wants.
Profit:
A profit is the remaining money after you pay all your expenses or in more sophisticated terms, it is the subtraction of expenses from revenue. Of course, the term profit is mostly used for companies. People prefer to use the term “savings” to better express this. Of course, most people don’t enjoy the prosperity of having any “profit” at the end of their months and they just live paycheck to paycheck to make ends meet, but that’s what we’re trying to change here.
Loan:
A loan is an amount of money you borrow to do something. Its forms vary from borrowing money from a friend or a family member to applying for a credit card or borrowing money from a bank
Interest rate:
Loans aren’t usually handed over to be paid back with the same amount you borrowed, especially with banks. You have to pay them back with an added amount of money. This extra added money is called the interest rate.
Debt:
Debt is the amount of money you are due to pay someone or some organization. If you borrow 2000 EGP from a friend, your debt to this friend is 2000 EGP.
Assets:
Remember passive income? Yeah, assets are one of the main generators for that. They are the things you buy or invest money in and in return generate money for you whether on a short term basis or a long term. As you know, money or cash loses its value over time because of inflation, so the things that you buy to keep the value of your money from deteriorating are also considered as assets.
Liabilities:
It would be an exaggeration to say that liabilities are the opposite of assets, but for a minimalist like myself, not so much. Aside from your needs, anything you buy that does not generate money is considered as a financial liability, at least according to Robert Kiyosaki in his New York Times bestseller book titled “Rich Dad, Poor Dad”.
Stay tuned for our next article when we breakdown all the practical tips we have gathered to help you be more successful in managing your finances.
