When Outflows Exceed Inflows, Upkeep will be your downfall

[Dennis Ng]

If your outflows exceed your inflows, your upkeep will be your downfall.
Whenever I conduct talks on Financial Planning, one thing I always cover is “Cashflow Management”.

And this is the phrase I always want participants to remember:

If your outflows exceed your inflows, your upkeep will be your downfall.

I asked attendees during my talk:
2 individuals, Mr A earns $10,000 a month. Mr B earns $4,000 a month. Who is richer?

Many of them would pick the person who earns $10,000 a month. Next, I said, if I tell you, Mr A who earns $10,000 a month also spends $10,000 a month.

While Mr B who earns $4,000 a month spends only $3,500 and saves $500 every month.

Who is richer?

My point is: it’s not how much you earn that really matters, it IS how much you managed to set aside, SAVE AND INVEST that makes a difference.

There’re only 3 Cashflow Scenarios:
3 cashflow scenarios:

Expenses exceeds Income = deficit (debts)
Expenses equals Income = a BIG fat 0!
Expenses less than Income = $$$ to Invest

Only the person in the 3rd scenario (spend less than he/she earns) would reach Financial Freedom one day.

Today, I read in Sunday Times 26 Nov 2006 about the sad story of the cause of the downfall of Mr Matthew Tan, ex-water polo star.

Note: please note that my comments and analysis is based on the newspaper report in Sunday Times page 35 on 26 Nov 2006.

In the newspaper report, it was reported that he earns $7,000 a month. Yet he went ahead to buy a $1.15 million house and his family own 2 cars.

He also travel to Johore regularly to play golf.

On the surface, a person like that would appear to be “well-off” (well to do).

However, he is actually heading to financial ruin becos he belongs to the first Cashflow Scenario:

Expenses exceeds Income = deficit (debts)

According to my calculations, assuming a person had NO other debt, if this person were to buy a $1.15 million house and take a 80% loan ($920,000 Housing Loan).

Assumes he take a 25 year loan and average annual interest rate is 4%, his monthly housing loan installment works out to about $4,856.

As I always advise, a person’s total monthly debt repayment should not exceed 35% of his Gross Income. It means that to buy a $1.15 million house, a person should have monthly income of AT LEAST $13,874.57, or roughly DOUBLE of what Mr Matthew Tan earns ($7,000).

This is a real-life story which shows that:

If your outflows exceed your inflows, your upkeep will be your downfall.

It’s really sad when this happened to someone who is admired as a “hero” by many sports fans as this is the very man who helped Singapore to win 10 consecutive golds in Water Polo in South East Asia.

His downfall could have been avoided if he had learned about Financial Literacy and if someone had stopped him from buying the $1.15 million house.

It’s also the reason why I make it my personal Life Mission to help raise Financial Literacy in Singapore and the region. Becos I firmly believe that if more people raise their level of Financial Literacy, it would help them to avoid financial mistakes, enable them to make financially wise decisions.

Many families have broken apart due to financial trouble.

Many had committed suicide due to financial trouble.

According to what I understand from Institute of Mental Health (I conducted a FREE Financial Planning talk on their invitation) that many people fell into mental anxiety and depression due to financial troubles.

What I will definitely continue to do is to do my part in helping in Public Financial Education. In fact, it’s my dream that one day Ministry of Education would finally realise the importance of Financial Literacy and make Financial Education a compulsory subject for all students (from Primary level all the way to tertiary education).

Cheers!

Dennis Ng