Miscalculating your surplus is very dangerous when it comes to creating your financial freedom! Make sure to do it right!
Surplus
A surplus simply means there is something left over. In our case we are talking about monthly income, so if you earn $2000, spend $1800 your surplus would be $200. We all know what happens when the surplus is negative, you lose money every month and eventually you will go broke or bankrupt.
Mistakes
Most people I talk to about their financial situation believe they have a surplus, where in reality they don't. Have look at the table below. This table is of course simplified we are not taking into account all costs and also no inflation and interest rates etc. Let's keep it simple guys:
| Monthly Expenditure | Wrong Calculation of Surplus | Correct Calculation |
|---|---|---|
| Income | $3000 | $3000 |
| Rent | $1200 | $1200 |
| Car | $400 | $400 |
| Food | $300 | $300 |
| Clothes | $200 | $200 |
| Fun | $350 | $350 |
| Supposed Surplus | $550 | Uhh, wait??? |
| Vacation | $200 | $200 |
| Repairs | $50 | $50 |
| Taxes & Insurance | $200 | $200 |
| Christmas Presents | $20 | $20 |
| Real Surplus | $80 | $80 |
The Problem
One of the biggest errors people make is to not account for yearly costs. People may put some money aside, and therefore think they are 'saving' $500 a month whereas in reality that money is already spent. It's spent on future expected expenses. This can be a vacation, or saving up for Christmas presents as well as council taxes or yearly insurance fees. Maybe the car breaks down who knows.
How It Should Be Done
I want you to calculate the REAL amount you're saving every year, which you are not going to spend on anything but investments. The money you save every month or every year that you put in a savings account, not for your pension, not your 401K, savings account which you are planning to use within maybe 2-4 years to invest. If the amount is $0 don't worry, we will work on getting that up soon enough. You do need to know however exactly how much that is. And if you're not doing it, you need to start doing it.
Increase Your Surplus
Increasing a surplus is very easy. For instance in the example above, in order to triple the surplus all we need to do is go from $80 a month to $240 a month. That's 300% growth on the current surplus in the example. We can cut, by spending less, or increase the income. The easiest thing to do appears to be cutting, however keep in mind, the total expenditure is $2920 so we can only every increase the surplus with that amount by cutting. It's a good start though. So, spend $20 less on clothes, $40 less on fun and maybe $100 less on a car. BOOM! We reached the goal.
Increasing Income
It would however be even easier to increase the income. In a 40 hour work week you work 160 hours a month on average. Increase your hourly wage with just $1 and you have tripled your investment savings every month (again in the above mentioned example). If you cut and increase you go from $80 to $400!!!
Another thing you could do is, since you are earning $18.75 per hour with this income, simply work 8 hours a month more. That is 1 day per month, and BOOM you're there. What if you work 1 more day a month, ask for a pay raise and save some money? You will now have an actual surplus of $558. That's almost times 7 with hardly any extra work!
Power of Surplus
Since most people have a very small surplus it is extremely easy to multiply it. You see, if your expenses stay the same, and your hourly wage rises just 2% - 3% you could already double your surplus easily, if it was small to begin with. A surplus of around $400 - $500 amounts to quite a lot of money that is ready to be invested at the end of the year.
I'm currently aiming to have 40%of my monthly income saved into my investment account. Therefore if I would earn $5000 a month my surplus would have to be $2000 and my expenses $3000 at the most.
Now that investment account is building up nicely, we will need to learn some more about what to do with it!
Stay tuned!