Financial Planning – Create Surplus

My personal financial plan is the road map that navigates me to my dreams. Cash flow management always the first part of a financial plan. It is all about my income and expenses. It leads me to know exactly my yearly take-home pay and spending. It is not just about counting pennies, it allows me to plan for next year budget, create a significant amount of surplus and subsequently plan for my luxuries.

Surplus or savings is an amount left over when requirements have been met. It is a financial situation in which income exceeds expenditures. It might be used to pay off debt, save for future, or to make a desired purchase that has been delayed.

Increasing income with well-controlled expenditure effectively increases my savings.

Increase Income

There are active income, passive income and portfolio income. Active income is an income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation. Passive Income is an income received on a regular basis, with little effort required to maintain it. It could be generated from rental activity or “trade or business activities” in which you do not materially participate. Portfolio income defined as income from investments, dividends, interest, royalties and capital gains.

Multiple sources of income help in increasing income. You may create your second active income by having a part-time job. Options could be tutoring, authoring, sales and etc. However, converting active income to passive income would be the challenge. Lastly, portfolio income could be created by diversifying savings into various types of investments.

Well-Controlled Expenditure

Increasing income with increasing expenses at equal amount does not help in increasing surplus. A budget plan plays an important role in determining how much to save and control expenditure. If you spend below budget, you would have surplus higher than expected. If you overspend, you would leave a smaller sum for saving.

Quotes by Warren Buffett:

  • on spending: “If you buy things you do not need, soon you will have to sell things you need”.
  • on savings: “Do not save what is left after spending, but spend what is left after saving”.

It is important to know the difference between what you want and what you need. Whatever not in your budget is not a need. Before any spending, please ask yourself: “Do I really need it?” If the answer is “No”, forget about it! There are more important goals waiting for you.