It's the New Year and I'm already imagining all the financial mayhem that may have hit (read here). I could imagine somebody right now may be crying over an empty passbook (which causes a bank account to be closed), five-six lenders will be chasing people playing the late Yoyo Villame's parody song "Dayang Daya" on maximum volume (read here), and the fact that they wasted all their money during the holiday season (read here). I think much of this could've been prevented by heeding this Warren Buffett quote. This quote says, "Don't save what is left after spending but spend what is left after savings." It sounds confusing but it would pretty much mean, "Budgeting on what you have."
People can say some people live paycheck-to-paycheck. Yet, there's really that bad habit of wasting the paycheck all year round. The paycheck arrives and instead of focusing on their needs, they focus on their wants (read here). It's a typical sight to see that the salary arrives and the person says, "Where are we eating out later?" They would eat out trying to forget their problems. Never mind that they've got a lot of stuff they may need to face such as bills piling up five feet tall on their desk. Even worse, they still follow the mantra that says, "Mapait? Eh di lagyan mo lang ng asukal." (Translation: "Bitter? Why not just add sugar?") (read here). It's pretty much somebody might be saying, "Lots of bills to pay? Let's add sugar to that by attending the town fiesta this January!" instead of focusing on how to pay the bills. That's why it doesn't make sense to live paycheck-to-paycheck and splurge the money from the paycheck. Even worse, some of them may not even be working properly.
I remembered how I screwed up my allowances only on. One of them was that in high school, I would spend impulsively. I would spend and spend and say, "My savings are based on what's left." Later on, I was taught this basic tip to set aside a certain amount of money and say, "I will only spend when I have this much. I will plan my expenses." It's pretty much allocating a certain sum for emergency funds and a certain sum for spending. It's like I'm only going to buy myself a new smartphone only when I need it. If I want to eat delicious food, I'll choose something that's cheap and delicious. In short, it's all about having planned expenses.
It can all go down to basic accounting principles
In a business, you don't get rich based on your gross sales. Instead, wealth is based on net income after taxes. You can't say the profit for the day is the sales for the day. It's because, in a business, there will be payments like labor costs, administrative costs, utility costs, depreciation costs, transportation costs, and the like. The sales are deducted from all expenses which creates taxable income. After that, what remains of the taxable income is the net income after taxes. This is the net profit. The company must then focus on spending on its needs over its wants. If the company decides its savings are based on what's left after its wants then that's not good.
The company budgets for the expenses. Is the company hiring too many people? Is the company stingy or thrifty? Is the company focusing too much on needs than on wants? Are salaries too low that people are demotivated to work? Would installing solar power in my company be better than spending repeatedly on a cheap generator that could be a fire hazard? Did I pay for the insurance of my business this year? It's pretty much focused on spending for long-term saving. Being stingy or being extravagant are both misguided with money. Any thrifty person would say, "I could care less if I have to spend big now on solar. It's better than that stinky generator that will compound my expenses!" A stingy person would say, "I could only care that I don't spend. The idea of compounded expenses is baloney!" An extravagant person would just spend without thinking.
We can also call that contingency spending. It's like the business owners put most of the money in a common account. The board of directors only takes a reasonable sum of money. It would be like that the co-owners only take PHP 10,000.00 (or higher) while the rest of the money is placed in operating expenses. Each board member can only take that much money per month. They can't just splurge the money from the common account. The only time money from the common account is used is for necessary expenses.
This would mean that one prioritizes savings over spending. We have contingency savings which are used as a backup. Contingency savings would mean emergency money used in a just-in-case scenario. Meanwhile, savings for spending means money meant to be spent for personal use. Following this principle can at leats save anybody from having no money when the time is needed.