A lot of websites on personal financial planning ask you to track where you spend your money and use that information to cut down on spending and increase the investments. When you are doing this you are essentially looking at the following mathematical equation between Investment, Income and Expenses:
Investment = Income – Expenses
In essence the idea is to track and minimize expenses so that you can increase the investments. This sounds quite logical and should work well. However, my experience has not been that good at managing this equation as the Expenses are very difficult to track at a minute level and take a lot of energy. Also very little can be done once the expenses has been incurred. So many years ago based – I restated this equation like this in my mind:
Expenses = Income – Investment
Mathematically not much has changed between the two equations but the essence has completely changed. The way the equation is now laid out, I have only that money to spend that is left from my Income after I have completed my investments. To me this has made a world of difference.
I maintain an investment target for myself every year and this annual investment target is split into 12 months. So now all I have to do is move a part of my regular Income into a separate account which is used only for investments and leaving the balance for all expenses. This requires so much lesser planning, ensures the investments are done regularly and the expenses take care of themselves.
This approach has worked well for me. What do you think will work and not work with this approach? Do let me know your thoughts on what works for you or your struggles in the comments section below.