Your expenses can foretell your financial future

We are all fascinated by the future. Many have gone to great lengths to consult prophets, seers, marabous, oracles, etc to foretell their future. There are things that are difficult to predict, based on the fact that we have no control over what others will do tomorrow.

However, most of what happens around us are as a result of decisions we made in the past. Success leaves clues. You can tell where someone is headed by the company he keeps, the books he reads, his daily rituals etc. You can predict someone’s financial future to a large extent based on their monthly expenses. The expense column reveals a pattern that tells a story. It also reveals the owner’s mentality – lack or abundance mentality.

Maintaining status quo

This type of budget is dominated by everyday items that have nothing to do with growth. It is essentially paying bills, buying groceries, entertainment, etc. It is a maintenance budget, keeping what you have without any plan for growth.

Since the prevailing mindset is maintenance, the focus is on the current source of income. Anytime there is an adverse economic condition, the response is to cut costs, look for cheaper alternatives or do without some things. If the person is image-conscious, things that maintain that image will be left intact.

The belief is living below your means. The underlying assumption is that your means are fixed and there is nothing you can do about it unless you get a pay raise or bonus. All you can do is make do with what you currently have, and if it does not fit, cut costs as much as you can. If it still doesn’t fit, then do without so that your budget will balance. This mentality keeps you looking down, shrinking further as your disposable income gets smaller due to inflation.

Heading for the poor house

This type of budget looks almost identical to the maintenance budget in that it is filled with items that do not lead to growth. The main difference is that the numbers don’t add up, as the expenses are higher than income. This person is spending above his income and is being sustained by loans.

This person can carry on this charade as long as the salary (which acts as the collateral for the loans) still comes in. The moment the salary stops, everything comes tumbling down.

Growing and increasing your means

This is a budget for growth. The budget, no matter how tight has items that will lead to growth. At the top of the list are items such as giving, savings and investment, books on investing, training courses, and seminars e.g. on real estate, fitness training, coaching, etc.

Cutting costs may be involved, but the focus is on reducing waste so that money can be spent on areas that will bring growth. You will see a reduction in areas like entertainment, phone and cable bills, etc so that the money and time will be invested in things that will bring an increase.

In this scenario, the cost-cutting is temporary. When the growth in income has been achieved, items removed from the budget are eventually replaced with better alternatives. Growth in income eventually leads to a higher lifestyle that is sustainable. This is delayed gratification in action.

Good and bad expenses

Expenses will always be with us. There is no running away from bills. The richer you become, the more bills you incur. Even when your financial situation remains the same, your expenses go up as you become older. If you don’t deliberately focus more on good expenses, bad expenses will overwhelm you over time.

Good expenses are expenses on assets. It could be on items that generate cash flow immediately like investment portfolios or businesses, or investing in your mind and body through personal growth and development, fitness training, etc. Consequently, good expenses make you richer.

Bad expenses are expenses on liabilities, things that take money for you but do not translate to growth. Some of these expenses are on things that are bad for you. They may actually lead to higher medical bills down the line.

Be aware of what you are doing

Take a second look at your monthly budget. How many items on that budget will lead to future growth? If all you do is maintain where you are, earning to spend, your financial future will look pretty much the same.

Many business owners, especially contractors complain about the irregular nature of their income. The nature of the business to a large extent dictates the nature of income. However, after the money has reached your hands, what have you done with it to generate other sources of income? What does your expense column look like?  What percentage of your expenditure goes into growth?

A farmer that desires growth plants more. That means a larger percentage of the harvest is allocated to cultivation. It is as simple as that. It is not rocket science.

For many, growth simply means going for a higher educational qualification. That is okay if all you are looking for is to earn a more comfortable salary. That means your well-being is still left at the mercy of your employer, inflation, etc. After you have earned a Ph.D. and become a Professor, what next? What is your post-employment plan?

What are you doing today to move you toward where you want to go? According to Management guru, Peter Drucker ‘The best way to predict the future is to make it happen’. You are already making your financial future happen by the things you are doing today. Your expenses hold a clue of where you are really heading financially.