As we mentioned previously, our theme for the first quarter of 2017 is (Building A Financial Blueprint). There are 7 cornerstones to this foundation. After expounding on the need for a personal budget, today we will examine how to properly manage our expenses.
One of the biggest misconceptions is that being financially responsible is the same as being ‘“cheap”. Oftentimes we consider the words: frugal, thrifty, prudent: as adjectives to negatively describe someone. However, being economical and financially vigilant are actually traits of maturity. The more responsibility you have, the more watchful you should be of your finances.
Learning to properly manage your expenses is a part of life that should not be overlooked. Expenses cannot be removed from the equation; therefore, we must do our best to lessen the burden that they can create in our lives. However, there are two different types of expenses: necessary and nonessential. Although this is a basic concept, each individual must be able to clearly distinguish between their needs and wants. These two concepts seem fairly straightforward, yet millions of people fall into financial hardship simply because they do not comprehend the meaning of these simple concepts. Let’s consider the following:
- NBA player Jarrett Jack’s shoe collection of 1,500 sneakers is worth roughly $375,000
- Ex-boxer Mike Tyson purchased 2 tigers for $140,000 and spent an additional $245,000 annually for food and animal training
- Ex-NBA player Scottie Pippen spent $3,400,000 for a private jet that he never flew because he could not afford the cost of maintenance repairs
- Boxer Floyd Mayweather purchased a necklace for $16,000,000
Although a tiger or private jet may seem excessive to you, recognize that shoes, clothing or jewelry may be examples of nonessential or ‘wants’ based purchases in your life. Another misconception many people share is the idea that “I do not need to worry about my expenses as long as I make a lot of money.” The above examples of poverty-stricken millionaires (the irony) should put a permanent end to this notion. Some of those mentioned above earned tens to hundreds of millions in their careers, but have since filed for bankruptcy. As the famous saying goes: “It’s not about how much you make, it’s about how much you spend.” Inconsiderate expense management can place you on a path similar to those described above. Many Americans fail to understand this basic principle. Take a look at the graph below:
Source: National Financial Capability Study: U.S. Survey Data 2015
It seems almost illogical that 56% of us spend equal to or more than we actually make. Thankfully, as a Clever African, you have already created a budget, and have placed limits on your spending.
As you periodically analyze your budget with the tools we suggested, you should evaluate your expenses. There are expenses that are necessary in order to live in our society, and there are expenses that are not. When it comes to needs versus wants, it is not ‘one size fits all’. For example, if you live in an urban setting, public transportation expenses may be a necessity whereas filling your gas tank would be the comparable need if you live in a rural setting. In our society, purchasing a cell phone may be a necessity, but spending on the most expensive phone may be a want. Each individual must evaluate their situation and accurately distinguish between their essential needs and their desired wants. The key is to reduce the costs associated with your need-based expenses, while also placing limits on desired purchases. Once you are able to comprehend the secret of expense management, you will be on your way to becoming a Clever African.