(The Story of Your Money is the ultimate beginner’s “for dummies” introduction to Personal Finance principles. This series is a primer that will walk you through the very basics and set the scene before you dive into the world of personal moolah management – I highly recommend you start with Part 1 [it will make more sense] even if you’re a pro!)
This is a story about Muhammad*, or Mamat for short.
Mamat is a regular person. And like most regular people, Mamat needs a number of things to go about on his regular day: food, water, toilet paper. Mamat also happens to live in the more fortunate, developed segment of the 21st century and so his needs extend a little further to include a smartphone, phone plan, internet connection, and the occasional cappuccino. To add to that, living in Brunei means Mamat also needs a car to get around – to go out to buy his toilet paper, to meet his friends for coffee, to drive to and from work. There’s no doubt his car is a necessity (in Brunei).
Aside from that, Mamat also wants a number of things (as regular people do). He goes to the gym and so pays for a gym membership (Mamat sometimes argues this is a “need” instead of a want, but let’s not argue today). He also has a thing for shoes – football shoes, gym sneakers, Italian leather work shoes. And once a year on his birthday he likes to buy himself something extra special, perhaps a new watch or the latest phone.
Mamat has a girlfriend, too. And he’s a generous guy, he likes to take her out to dinner and occasionally buy her nice things. Someday (when he’s “ready”), he would want to marry his girlfriend, of course. The wedding wouldn’t be too over-the-top but he wouldn’t want it to be too small. After all, a wedding is (hopefully) a once-in-a-lifetime thing… right? After that they’d settle down, try to start a family and hopefully be blessed with a child or two (or maybe three). And someday, Mamat would want to move out of his parents’ house and buy his own home, where Mamat and his wife would grow old together – white picket fence, children, cat, and all.
Sound like a familiar story? Now Mamat’s a great guy. A great but very regular kinda guy.
And as life (and capitalist reality) would have it, in order for Mamat to live this life – with an uninterrupted flow of basic, daily necessities, all the additional extras, the wedding, the wife, the home – he’s gonna have to fork out some moolah and pay.
So where would a regular guy like Mamat get the money he needs?
He’s a sensible guy. Mamat has a job, of course. No shady business. After finishing school, Mamat went out and got a good, regular job.
In return for Mamat’s time and effort (typically 8 hours a day, 5 days a week), his employer (the government or a private company) pays him a stable monthly income (at the end of every month, a decent sum deposits itself into his bank account) and Mamat’s cash pocket is suddenly nice and fat.
Simple enough, right?
Oh. But, wait. What about all that stuff Mamat needed and wanted? And it’s a lot of stuff.
Most of us are extremely familiar with this very simple flowchart (and perhaps didn’t need such a long-winded and elementary explanation). It demonstrates the very basic income and expense process, where INCOME (salary, pay, gaji) is money flowing from work into Mr Mamat’s pocket and EXPENSE (spending, bills, belanja) is money flowing out of Mr Mamat’s pocket to buy all his needs, wants, and material desires.
(I will now skip the long and arduous route of over-explaining and searching for accompanying clip-art).
There are three main ways this Income VS Expense process could play out, on a monthly basis:
- If Income = Expense, Mamat will be “living from paycheck-to-paycheck” and have no money leftover (i.e. no savings).
- If Income > Expenses, there will be some money leftover, which Mamat may be able to keep as savings (yay, good news!)
- If Income < Expenses, this is where real trouble walks in – and his name is Debt (bad news – avoid!)
Understanding this process and the different possible ways it could play out is important because the first pillar of personal finance success is to live below your means. That’s Situation 2, where Expenses (“living”) is less than (below) income (“means”).
Otherwise, you would instead find yourself in Situations 1 and 3 (i.e. living paycheck-to-paycheck and/or swamped with debt); this is a dangerously slippery slope and you may very well find yourself falling straight into the all-too-common struggle for control before you realize it.
We’ll explore how that happens and what that’s like in Part 2.
*Muhammad is the most common first name in the world. In Brunei, “Mamat” or “Mat” are common simplifications.