Expenses, cost are greatest wealth-building enemies

Jeanpo Olowo. PHOTO/FILE

What you need to know:

Handling expenses and costs with the right strategy and investments portfolio will make the wealth cycle work for you

An expense is an item requiring an outflow of funds of any form for goods or services that are made on a regular or ongoing basis for an individual or while doing business.

 A cost on the other hand is an amount paid to acquire an item and typically it’s a one-time payment. Whether it’s an expense or a cost, know that it’s your enemy if you are a wealth builder who wants to achieve financial freedom. They can be categorised in a variety of ways: Operating expenses that are made up of wages, selling, general, administrative, insurance, depreciation or amortisation, or cost of sale of goods. Non-operating expenses can include interest, taxes or impairment charges. Fixed expenses (these doesn’t vary with changes) they could include rent, salaries, benefits, or wages. Variable expenses (vary with changes) they include transaction fees, commissions, marketing and advertising. One has to note that some expenses can be fixed or variable. At any of the wealth building cycle blocks you may lose your resources to expenses if no attention is paid keenly.

 A 100 percent achievement rate is every wealth builders dream, but how many of us actually put in the work to achieve it? Financial freedom cannot become a reality unless we put in the work. Whether we see it or not, expenses and costs are wealth’s greatest enemies.

They are capable of eating up all or part of your efforts at any of the blocks. The statement made above is true if one lacks proper planning and financial discipline. You need to plan your income, savings, assets and cash flow and stick to those plans that you have laid out.

 Never speculate any expense or cost create a budget to avoid unnecessary expenses. Without financial discipline, it’s impossible to attain your financial freedom. If you are spending more than you earn, the math will never make sense.

Wanting to accumulate unnecessary things i.e each time a new electronic gadget is released, you are tempted, do you really need it? Understand the difference between necessity and luxury. Of course once you have attained your freedom it makes all the sense. Don’t give in to lifestyle inflation (increasing your spending with an increase in your income). Rather, aim higher on increasing your investments. Not all debt is bad.

Understanding how much debt is good and how much is bad is the key. Debt expense can be your greatest setback. Loans such as educational loans, home loans, small business loans, etc. could be good if properly managed. Inflation is an hidden expense that has the ability to wipe out all your returns completely.

 Always make sure that your investments are able to earn you returns that are over and above the inflation rate. Poorly structured investment portfolios can cause you to lose it all. Make sure you have the right asset mix and are invested in instruments that suit your risk tolerance and investment horizon.

Don’t be emotional towards investing. Educate yourself and diversify your investments. Unexpected events in your life have a great impact on your financial freedom like unemployment, illness, legal complication or death, etc. Make sure you have built an emergency fund as your contingence plan. Handling expenses and costs with the right strategy and investments portfolio will make the wealth cycle work for you. At any block in the cycle, there is potential of losing it all to expenses or costs and get derailed.

Dr. Jeanpo Olowo is an advisor/consultant: Financial & Business Operations.