The above diagram illustrates the breakdown of our life through the lens of finance/monetary.
If the lens used is of inferior quality, one cannot see the whole picture with clarity. For the purpose of achieving a financial stability comfort zone, it is paramount to use a microscopic lens that captures all the essential features that each responsible and accountable individual ought to practice in order to strike a safe comfort zone of financial stability.
Based on the equation INCOME = EXPENSES, below are some expanded explanation of the diagram above.
The left hand side of the equation, i.e. INCOME.
The active and passive income produced are used to support the expenses as well as other financial commitments. For as long as one is economically productive, aggregate income generation is an important part of our life. Ceasing to generate income (either active or passive) will cause haywire in the financial stability framework. Low living condition, mental torment, high possibility for bankruptcy declaration, health condition deterioration are some repercussion that will hit an individual if income is disrupted. Therefore, in the diagram above the most important element to a financial stability pillar is income generation. There is no point of talking about the framework if there is no existence of ability to produce income.
On the right hand side of the equation you see EXPENSES and this has to be balanced with total aggregate income. To some, EXPENSES are limited to just living cost, and to other some it means beyond that. As the diagram shows, EXPENSES are actually components of:
- Living Cost
- Contingency Cost
- Emergency Fund
- Retirement Fund
- Risk Mitigation Cost
I have named 5 components of EXPENSES but this is not limited. However, 5 components are sufficient enough, if practiced well, to catapult an individual to a Financial Stability position.
