Monday, August 9, 2010

Thanks for the Tip

This personal Finance article from Forbes online has stated that the 5 expenses that will consume 50% of your lifetime earnings are home, car, kids, education and retirement. While it does provide interesting facts and figures as to the ideal percentage of our income that we should be saving to have these things in our lives and still live comfortably above the margin line, it's surprisingly unhelpful otherwise.

While most of us know that there is an ideal pie graph out there that spells out what we should spend on what areas of our life and colour coordinates different categories of expenses that make up our daily lives, it doesn't spell out how this is feasible in the real world. Let's face it, personal finances are easy when they're on paper. They're controlled, they're carefully calculated and some of the most judicious of us even put in anticipatory inflation rates so as to calculate our future costs.

But give me a break. How many of us in the real world do this?

We all know that life is expensive. We also know that the only sure things in life are death and taxes. We also know that you need to plan for and make sacrifices for the things that you really want and that you can't afford to have a champagne diet on a beer budget. But none of this really helps.

The truth of the matter is that life, unlike finance, is completely unpredictable and messy. Sure, we're smart and we can plan on a 5 year interval to complete our Masters degree and then put 5% of our income aside for a downpayment on a home. But then life steps in, unwelcome and unannounced: the heater breaks, your car needs serious repair or it will collapse in the middle of the highway, your mother gets sick, your partner gets pregnant (surprise!) or your cousin gets kidnapped by revolutionnaries while traveling to South America and needs you to pay a ransom.

And then there's the choices. Education may be expensive, but what if you need to get a better job or your current job makes you unhappy? And maybe you want to own a home without having to ride a bus a half hour into work one way every day for the next 25 years of your life. And are you really going to let an Excel spreadsheet of numbers from the last fiscal year dictate to you whether or not you can have children? Come back down to planet Earth, friend.

If this article wanted to offer some practical advice that real people may actually use, it could have pointed out that cash is often lost in unnecessary places and eliminating these black holes for cash may be a better option than calculating percentages for the next 25 years with a 3% inflationary rate.

Practical advice like dropping little extras like coffee and bringing your own from home or bringing in lunch. Buying in bulk for those things that you always need and that don't expire, such as household supplies and cleaning products. Going generic for certain items. Handwashing your own clothes or taking public transport. And one of the most important: don't buy now and pay later. Save up for the things that you want and then buy them with cash that you have.

Pretty simple when you think about it.

Not so easy to apply in real life. But a heck of a lot easier than calculating future inflationary rates and rotating colourful pie charts that are supposed to represent your life.

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