Friday, April 10, 2009

Reality Check #1: Understanding Cash Flow - A First Step to Financial Freedom

I am no financial guru, but I try to be more knowledgeable by reading up on financial news sites and blogs. I stumbled upon this blog post called Illustrated Cash Flow For Dummies from this site called Money, Matter, and More Musings posted back in 07 but still proved true to this very day. This might be important advice for all shopaholics out there.

The figures on the top row illustrates the different levels of frugality where savings are high and spending is low. The figures on the bottom row shows the different levels of excessive spending (a.k.a shopaholism) where spending is high and savings are low The middle figure illustrates financial freedom - where everyone strives to be. The more water in the tank indicates the more savings you have. It is pretty self-explanatory and I am certain every single one of us would fall into one of these categories.

Another interesting fact I discovered is that the scales of frugality are different for rich and poor people. And hence, it might be a bit presumptuous to call someone a spendthrift or frugal based on the things they buy (or the things they pay money for). I am going to explain this in the life of a Fashionista. A rich Fashionista who has loads of savings and investments with zero debt would not be considered a spendthrift if she buys a $2200 Prada handbag and a pair of $1500 Christian Louboutins a month. On the contrary, a working Fashionista who struggles to pay rent would be considered a spendthrift even if she spends $2200 on that Prada handbag; not to mention both items a month. Take myself for example, if what I can afford to buy is a $300 dress for a wedding I'm attending, then buying a couture gown that costs $2000 would make me a spendthrift even if I have that $2000 to spend.

With so much materialism in the world, it is a challenge for most people to lead an extremely frugal life. Possessing excess leverage has become a big problem and life is such where most people want to have nicer things and live better lives. But it is perhaps time to realize that we should count our blessings and be contented for once and think not about what others have and what we don't have, but what others don't have that we have. I used to envy the rich and famous who own numerous Chanel, Hermes and Prada bags. Now, I consider myself lucky to own several Chanel and Prada Hermes Birkin Bag yet. Most of my expensive fashion "investments" were from the bonuses I got from closing several big deals in my career in the past several years.

In my humble opinion, everything in life is about achieving a balance. At the end of the day, everyone can own something that they like or need. It is a matter of expectations and contentment and knowing what you can and cannot afford. If you have been keeping the habit of saving, then good for you and you should be proud of yourself. If you have never had the habit of saving, then now might be a good time to start. It is never too late till it is too late.