Money management is the greatest key to unlocking all the treasures on your road to wealth. This post is somewhat inspired by STE once again on his latest post (Is Winning the Lottery Cursed?)
I strongly believe that it is never about how good of an investor you are or how high your income is neither about how great your windfall will be. If one is not prudent and does not manages his/her monies well, I believe that no one should be blamed for your mishap.
I personally know many of such people around my life. Those high flyers with a household income of $250-300k annually, having debts and live from paychecks to paychecks with insufficient funds to tie them through when a misfortune happen. And surprisingly, I’m even more shock to know that they’re blaming everyone aside themselves for the bad luck that is shown on them!
The significance of money is presented differently to every individual and it is very subjective to be making any comment about it. It would not be expensive for a watch enthusiast to spend $100k on a Richard Milles but it would be a crazy to majority out here who doesn’t know how to appreciate them.
Most commonly, I refrained myself from making any comments or talk about finances to anyone I know personally as much as possible as I’m not in any position to do so. I also don’t enjoy the stereotype that is given from people about the fact that I’m only 20 years old and it’s never wise to act smart.
The topic about finances is a very sensitive one and it’s very subjective to each person’s profile.
To regular readers, I believe most would know that I will keep my explanation to the simplest term possible for easier understanding and to avoid further complication. Ha! Please pardon me for that terrible excuse here to cover on the fact that I’m actually not that smart.
Back to where the topic started - Money Management.
As shared in my previous post on Cashflow, this post will be a small supplement to the topic and to keep things simple, we’re back down to the 2 points again to improve on your financial situation.
1. Increase your income
2. Decrease your expenses
Yes, it’s that simple to type it out. And I’m placing a relatively big bet that majority of the population knows about this. But the question is how?!
As an investors, most are screwed towards buying a company that is consistantly poses an ever-increasing revenue. While that is not wrong, but can you imagine that the expenditure and cost is also increasing as well? The whole key to looking at the picture is to identify if the company’s profit is growing steadily.
Perhaps a small simple example below in a few words could explain this:
FY2015 Revenue = $100M, Cost = $50M, Profit = $50M
FY2016 Revenue = $150M, Cost = $100M, Profit = $50M
FY2017 Revenue = $250M, Cost = $220M, Profit = $30M
FY2018 Revenue = $400M, Cost = $380M, Profit = $20M
This company we see above has it’s revenue increasing steadily from $100M-400M in 4 years! Which is nearly 100% growth a year we’re looking at! How impressive is that! But taking a look at the cost, it’s increasing much more steadily as well.
But if we take a look at the profit, the company actually doesn’t earn as much as it used to in 2015. They’re infact earning less than half of what they used to earn!
In fact, as an investor, we might even see our dividends get thinned out if they’re paying it from their free cash flow!
But it is always the case that it is more glamorous for a company to pose that they’re getting a greater revenue than it is to tell you it is reducing on it’s cost. Most commonly, when cost reduction comes into play, it represents that the company might be trying save themselves from something.
It is also widely used that if a company has it’s cost increased due to the start of a new project, it is fine. But the only question will comes when the CAPEX could not taper off after sometime.
It’s important to have FCF, and it’s even more important when we invest, we invest in a company that manages their monies well. Which is why I always believe that, it is important for a company to have an excellent management.
A little too much here.. let’s relate this back to us, personally on the money management front.
Person A is earning $2,200 when he first step into the society and slowly after years, the salary
increases. But here’s one thing that is still common, which is that he will still have to live on his paychecks with no significant progression in savings because as his income increases, so does his expenses.
Person A will pamper himself a little more than indulge in some form of luxury that depletes his wealth. Unknowingly, restricting himself from further savings despite having a growth in income.
It is important for one to have a higher income to accelerate the speed of savings to build more wealth. But it’s more important for one to have discipline and some form of money management in order for them to be able to accumulate wealth faster.
So simply, the very first step is MONEY MANAGEMENT.
I shall end this small idea about money management here before I progress into the next topic.
