In this blog, we’re going to delve into the 3 essential pillars of financial planning: earning, spending, and saving. In our previous article, we explored the importance of financial knowledge and its impact on achieving financial stability. While these concepts might seem basic or even elementary, understanding how to effectively balance and integrate them can lead to remarkable results. You might think you already know about these pillars, but discover how their harmonious interplay can create a powerful strategy for transforming your financial future.

3 Essential Pillars of Financial Planning

3 Essential pillars of financial planning equation: Earning – Expenditure = Saving

At its core, financial health is about ensuring that your income (earning) exceeds your expenses (expenditure) so that you can set aside money for savings. Here’s how each component plays a crucial role but before that lets dive into a related personal perspective.

A Personal Perspective: The Reality of Living Fully

I know personally many individuals who earn a decent income but spend almost every penny they make, leaving little to no room for savings. Their common refrain is that they want to live life to the fullest, enjoying every moment without being bogged down by financial concerns. While their intention is admirable, the reality is that this approach often leads to financial stress and missed opportunities for future stability.

Take, for example, a friend of mine who earns a comfortable salary but chooses to spend extravagantly on dining out, vacations, and the latest gadgets. Despite the thrill of these experiences, they often find themselves stressed about unexpected expenses and lacking a financial safety net. When emergencies arise, or when it’s time to plan for long-term goals, they face significant challenges due to the lack of savings.

Living life to the fullest doesn’t have to mean spending every dollar you earn. Imagine if my friend had saved just a small portion of their income each month. They could have built an emergency fund, invested in opportunities, or even taken time off work to enjoy life without financial worries. Balancing 3 essential pillars of financial planning i.e earning, spending, and saving can allow you to savor life’s pleasures now while also preparing for a secure and fulfilling future.

Earning: Maximizing Your Income

Earning refers to the money you bring in through your job or business what you do. To create a strong financial foundation, it’s important to focus on increasing your earning potential. This could mean seeking career advancement, pursuing additional education or certifications, or exploring new income streams.

Example: Imagine you have a job that pays $50,000 annually. By acquiring a new skill or certification, you might be able to negotiate a salary increase to $60,000. This additional income provides more room to save and invest.

Expenditure: Managing Your Spending

Expenditure encompasses all your regular and discretionary expenses, including rent, utilities, groceries, and entertainment. Effective financial planning requires you to manage your spending wisely to ensure it doesn’t exceed your income.

Example: Suppose your monthly income is $5,000, and your expenses total $4,000. By tracking your spending and identifying areas where you can cut back, such as dining out or subscription services, you can reduce your expenditures to $3,500. This adjustment increases your savings potential.

Saving: Building Your Financial Cushion

Saving is the portion of your income that you set aside after covering your expenses. This money can be used for emergencies, future investments, or achieving financial goals. Effective saving involves not only putting money aside but also making your savings work for you through investments.

Example: With a balanced budget where your earnings are $5,000, your expenditures are $3,500, and you save $1,500 each month. Over a year, this amounts to $18,000 in savings. If you invest this amount wisely, it can grow significantly through interest and returns.

The Earning – Saving = Expenses Formula

When it comes to managing your finances effectively, the new formula Earning – Saving = Expenses can be a game-changer, especially for single individuals and those without dependents. This approach emphasizes the importance of saving before determining your expenditure, helping you build a solid financial foundation while still enjoying your lifestyle.

At its core, this 3 essential Pillars of Financial Planning formula underscores the principle that saving should be a priority, not an afterthought. By allocating a portion of your income to savings first, you define how much you can comfortably spend. This method ensures you are prepared for the future while managing your current expenses wisely.

3 Essential Pillars of Financial Planning

Finding Balance: The Key to Financial Success

While the Earning – Saving = Expenses formula is highly effective, it’s important to remember that financial management is about balance of 3 essential Pillars of Financial Planning. For those with family or dependents, certain expenses are unavoidable and should not be compromised in the pursuit of saving more. It’s crucial to find a balance between saving and spending that fits your unique circumstances.

Example: If you have dependents, your budget might include essential expenses such as childcare, education, and medical costs. In such cases, saving might be a smaller percentage of your income, but the principle remains the same—allocate a portion of your income to savings first and manage your spending within the remaining amount.

I hope it helped you to give a different perspective. Do share your comments and stay tuned for more exciting content.

The Importance of Financial Knowledge: Beyond Earning Money

Welcome Back to the Blog!

Before diving into the how, let’s first explore the why.

We often hear that happiness comes from earning more money, but the truth is, financial knowledge reveals that financial success is about much more than just boosting your income. To truly thrive financially, it’s essential to understand not just how to acquire wealth, but also how to manage and grow it wisely. In this journey, financial knowledge is your most powerful tool. Together, we’ll explore why mastering these concepts can make all the difference in achieving your financial goals and securing a brighter future.

The Reality of Financial Knowledge Mismanagement

You might have noticed how some celebrities and high-profile individuals accumulate significant wealth, only to face financial ruin later. This underscores a vital point: possessing wealth is not enough; managing it wisely is essential. History is replete with examples of people who, despite their wealth, ended up bankrupt due to poor financial management.

Take, for instance, the story of Mike Tyson, one of the most famous boxers in history. At the peak of his career, Tyson earned over $300 million. However, his inability to manage his finances, coupled with extravagant spending and legal troubles, led him to file for bankruptcy in 2003. Despite his enormous earnings, Tyson’s story highlights how essential financial management is, regardless of how much money one initially accumulates.

Another example is Evander Holyfield, another boxing champion who earned over $500 million throughout his career. Holyfield’s financial woes included lavish spending on multiple homes, cars, and a large staff, which, combined with poor investment decisions and legal battles, led him to bankruptcy. His experience illustrates how even significant wealth can quickly erode without careful management and planning.

Similarly, Nicolas Cage, the renowned actor known for his roles in blockbuster films, amassed a fortune estimated at over $150 million. However, his penchant for buying numerous properties, including castles and rare artifacts, coupled with poor financial advice, led him to financial difficulties and tax issues. Cage’s experience serves as a reminder that even substantial earnings can be mismanaged, leading to significant financial distress.

These examples underscore a crucial lesson: managing your finances effectively is as important as earning money. Without proper financial strategies, budgeting, and investments, even the wealthiest individuals can find themselves facing financial instability. This highlights the importance of financial education and strategic planning to ensure that your wealth is not just acquired, but also preserved and grown wisely.

The Balance Between Earning and Spending

J.K. Rowling, the author of the Harry Potter series, provides a contrasting example of financial management. After achieving immense success and wealth from her books, Rowling initially faced significant financial struggles due to her overspending on an extravagant lifestyle. However, she later adopted a more balanced approach, focusing on prudent investments and charitable giving, which helped her maintain and grow her wealth responsibly.

Similarly, many individuals with modest incomes might fall into the habit of underspending, either out of fear or a desire to save excessively. For instance, Tina, a fictional character, might diligently save and invest every penny she earns, avoiding any form of leisure or discretionary spending. While this might seem prudent, excessive frugality can lead to a lack of enjoyment in life and missed opportunities for personal and professional growth.

Why Do We Save?

A common question arises: Why do people save so much money if they don’t seem to have a clear plan for spending or passing it on? According to a survey, several reasons drive people to save:

Unforeseen Costs: 40% worry about unexpected expenses.
Legacy: Many see savings as a way to leave a financial legacy.
Emotional Comfort: Savings provide peace of mind.
Fear of Running Out: Some fear depleting their funds if they start spending.
Preservation: Around 20% prefer to conserve their money because once spent, it’s gone.

These reasons prompt an intriguing question: Why work so hard to earn money if you don’t plan to use it? What if there’s a way to save effectively without being overly frugal?

The Global Financial Literacy Challenge

Financial literacy is a pressing global issue. Despite high education levels, financial education often falls short. Many people struggle with basic concepts like saving, investing, debt management, and budgeting.

Consider the case of Greece during the financial crisis of the late 2000s. Despite having a highly educated population, many Greeks faced severe financial hardship due to a lack of understanding about personal finance and debt management. The crisis highlighted how even well-educated individuals can be unprepared for financial challenges if they lack practical financial knowledge.

In the United States, financial literacy is also a significant concern. For example, a 2023 survey by the National Endowment for Financial Education revealed that nearly 60% of American adults struggle with basic financial concepts like compound interest and credit scores. Despite having access to higher education, many still find themselves in debt due to a lack of understanding of how to manage credit or plan for retirement. This gap in financial education contributes to widespread issues such as high credit card debt and insufficient retirement savings.

Globally, the situation is similarly troubling. In India, a country with a rapidly growing economy, many individuals still face challenges with financial literacy. A 2022 report by the Reserve Bank of India showed that a significant portion of the population lacks basic financial knowledge about financial products and services. For instance, many people are unaware of how to manage personal loans or invest in financial markets, which affects their ability to make informed financial decisions and secure their financial futures.

The State of Financial Literacy Around the World

Financial literacy varies widely across the globe:

United States: Many households are burdened with credit card debt, and many have not saved for retirement.
China, Russia, Brazil, South Africa: Financial literacy rates in these countries are similarly low.
Developed Countries: Even in wealthier nations, financial literacy issues persist, indicating a widespread problem.

Many people turn to friends and family for financial knowledge advice but often lack access to professional guidance. Addressing the basics of financial education is crucial.

Bridging the Gap: Practical Financial Education

The key to improving financial literacy lies in education. Schools should not only teach theoretical concepts but also practical financial knowledge decision-making. Understanding how to budget, calculate expenses, set realistic savings goals, and track progress is essential for financial health.

The Impact of Financial Literacy

Recent surveys highlight that many individuals, especially millennials, struggle with financial literacy:

72% are unsure about how much to save or invest for financial independence.
76% believe there is a need for more financial planning education.
51% of millennials feel a lack of personal finance knowledge is hindering their financial progress.

Financial literacy helps individuals make informed decisions, maintain a healthy credit score, and improve their standard of living. For instance, you might need at least one million dollars to retire comfortably and live without working for 30 years. Financial literacy provides the tools to make smart investments without unnecessary frugality.

The Path to Prosperity

Ultimately, financial literacy is key to leading a well-balanced and prosperous life. Understanding and applying sound financial principles empowers you to achieve your financial goals and secure a more fulfilling future.

That’s where Saving Cedar comes in. Drawing from my own personal experiences with managing finances, I’m here to help you navigate the complexities of personal finance knowledge with confidence. Having faced and overcome various financial challenges myself, I understand the importance of having the right tools and knowledge at your disposal.

The 3 Essential Pillars of Financial Planning : Earning, Expenditure, Saving