The Break-even Approach To taking Care of Your Finances Over Time
The Break-even Approach To taking Care of Your Finances Over Time.
The Break-even approach is meant to offer you a handy tip for your management of finances.
A saying goes,
that ‘you cannot give what you do not have’.
We can tweak this under the basics of finance that ‘you cannot spend more than your income’
Savings the Break-even way
When you take an aggregated approach as to the way you run your finances, you can be able to narrow down to two broad variables.
That is the incomes(money you are receiving) and the expenses (money you are paying out).
When you are able to track the two of them over a set period of time, you will get that general trend as to whether you are making a saving or spending more than you did bring in as your income.
Getting used to the Savings Habit
When you get used to the habit of sifting over your incomes and expenses in their summaries over some extended periods in time, say monthly for over a year, figuring out the trend will not be an uphill task for you.
In fact, you can get it right from your very first month of tracking.
Towards breaking down each of the elements when it comes to the Break-even approach, the logical application that entrepreneurs use will still apply.
Over your set period of time, break down your bulky expense costs into two classes;
Fixed cost: these are costs that you will incur by virtue of time.
An example is space rental, even if you stay away or abroad from your flat for half of the year, you will still be required to pay rent for that space.
Other basic expenses falling under fixed class are electricity, water and even talk of school fees. For school fees, you will be billed promptly even if you attended lesser of lectures and so forth.
So with a fixed cost, it has a constant obligation over time like monthly for rentals and per semester for the college fees. The fixed costs have not shortcut as long as the contract is in force.
Variable costs: these are costs that your decision can lead to either incurring none or significantly less for your needs.
A good example for this is your entertainment bill, say on a monthly basis. A student, for instance, can choose to incur none and pulling in more of time for studies and exams, or else take the breakaway sessions even as frequent as daily, with cash to sustain the habit.
Variable costs have an option, to incur or not according to one’s choice of decisions. When it comes to contracts, variable costs have no contracts in place to enforce payments.
Keep in mind…all decisions lie with you…
However, you may not entirely escape from them like the basic needs for meals and clothing.
The leeway under variable costs is that you have options to choose the service providers, their costs and perhaps some shopping around for the best.
Now, here comes the nut in break-even analysis. Each time you sum up your variable and fixed costs, the aggregate must be lesser than your total incomes. Try to figure it out with the figure below in your mind.
From the above graph, when you hit level (x) you know that you have managed your fixed costs.
On the same, when you manage the level (z), you have hit your variable costs.
It will be good if you keep your period of analysis constant.(both for the fixed and variable costs undertaken concurrently).
The key point here:
When you are able to figure out all your expenses singly and classify it as fixed or variable within the broader picture of your total incomes and expenses, you are in the right direction of being in control of your wealth.
For you to be in control of your wealth, your total cost of living, which will be your total fixed and total variable costs summed up, must be a figure below your income within the same period.
If the total cost exceeds your incomes, you are into the woods. You will have to get additional income to fuel your expenditures.
It’s good that you remain informed that the graph is not static but subject to change.
In essence, it is radar to guide you on your incomes and expenses. Perhaps you find your costs are too high, your options will be two-fold. Either of;
- reduce on expenses significantly to fit onto your income portfolio, or
- Increase your income portfolio to cover the expenses adequately
Savings from Break-even analysis view
When you have more income, it raises your marginal propensity to save (MPS) and the more you save, the more likely are the chances that you will cover your costs adequately into the foreseeable future.
When you make your savings, be sure to invest the resources wisely.
A good investment will be one that increases your incomes at a higher rate as opposed to one that gives a small fraction of the same.
If you look in keenly, the Break-even approach is just a tool.
Working with it will give you a more precise angle of what your ratios are for both variable and fixed costs are.
Your Habit will become your Practice… with time(making savings the Break-even way)
If you get this over a period of time, it then becomes very easy for you to take measures to increase your savings.
Remember you also have an option to increase your income and save more, based on your analysis from this.
Well, quite a long post.
Do you have any observations? I would appreciate your opinion via the comments below…