Basic Premise

The Past, Present and Future of Your Money Situation… Unraveled in Just 10 Minutes

There are hundreds of personal finance blogs out there. I have followed many of them over the years, gratefully and diligently adopting the great advice that these bloggers have put out.

Over a period of time, I have come to realize that the basics of almost every personal finance situation boils down to a handful of simple scenarios. You grasp that and you can steer yourself in any direction you like. It really is that simple to turn your whole financial world around, if you so wish.

What are these simple scenarios, you ask?

Let me explain.

At its core, the personal finance situation of most people typically looks like this


Personal finance at its core. When inflow == outflow, it is the typical "hand-to-mouth" scenario

Most people have one source of income, as depicted by the large tap at the top. Typically this is some sort of a “job”. In some cases, like that of students, it may be scholarship money or money from parents. In other cases like that of stay at home moms, this may be the family income brought in by a spouse.

The expenses occur in the form of smaller multiple streams, as depicted by the taps at the bottom of the barrel, to take care of the daily needs – food, shelter, health, entertainment etc.

This is not a bad situation to be in as long as –

  • You earn more than you spend – i.e, the water flowing into the barrel is more than (or at least the same as) the water flowing out of the barrel.
  • The tap pouring in the top never runs dry – which goes to say your job needs to be stable, and if you lose one, you should be able to find another one very quickly.
  • Your barrel is completely leak proof – which goes to say you will not run into any unexpected expenses, which as we all know, is totally unrealistic.

When the top tap flows water in at the same rate at which the bottom taps take it out, you have your typical “hand-to-mouth” scenario. Even the slightest amount of change in earning, or spending, can cause the barrel to run dry pushing you into debt.

And in some cases, either due to ignorance or irresponsibility, people let their expenses keep on going up, without paying any attention to increasing the income to keep up. Now, all that expense has to be paid for somehow, right? And that’s how debt comes into the picture. A debt scenario typically looks like this


Typical "debt-trap" scenario if you keep on borrowing...

When what you bring in does not meet your expenditure, it may look like a sweet deal to “borrow” the money to make up for the difference. But the problem with borrowing is that this “extra” tap at the top will turn off after a while. At the same time, you will have a new, unwanted, additional tap at the bottom of the barrel to repay the borrowed money. Now you are in a worse situation than before, because in addition to your regular expenses, you have the debt repayment to take care of.

You can add more “borrowed” money and cover for this repayment, but as you can see, this is an endless vicious circle. This is your typical “debt-trap” scenario.

Instead of reaching for debt (or while recovering from their earlier debt situation), a lot of people realize that one of the things to do is to turn off, or at least reduce the flow of the taps at the bottom — the expenses. This is what a lot of personal finance bloggers advocate. The situation typically looks like this.


Typical "frugal living" scenario

This is your typical “frugal living” scenario. While this definitely is a good thing to do, and will help keep you out of debt, there are two issues with this –

  • There is only so much you can cut down on. You can never turn all the taps at the bottom off entirely because you will always need some money to cover for basic necessities like food, roof over the head, etc.
  • We human beings are inherently materialistic. Yes there are some minimalists – and kudos to them. But to the rest of us, skimping and scrounging all the time feels like a total drag. We can (and should) curb the impulse to “spend, spend, spend”; but to most of us “save, save, save” all the time is not a viable long-term option either, without seeming like all the joy is sucked out of life.

I know the two issues first hand, because, this was what I focused on while chipping my way out of debt and later, as I became more and more personal finance aware.

Here’s the thing though. I am smarter than to just keep doing something that doesn’t seem to work. If you are still reading, I bet you are too, and know exactly what comes next 🙂

A better way to deal with the situation would be to look at the flip side of the coin — add more income into the barrel.

Now you have two ways to do this.

a) Increase your primary income – i.e, figure out a way to turn on that tap at the top a wee little bit more, and keep on doing it. and/or
b) Add some additional streams of side income – i.e, add a few more taps at the top.

Lets take a look at each of these situations now.

With option (a) where you increase your primary income, you situation looks quite similar to the very first scenario we saw – except now you no longer live hand to mouth.


Typically what most folks do -- bump up the primary income

Thanks to the increased income, you now have more coming in, than what is flowing out. So you can get rid of your debt, and start to build a savings. This is your “I’m-in-a-good-place” financial situation.

There are many ways to bump up your primary income – work smarter instead of (or in addition to) working harder, higher education and certification, improving communication skills and personal marketability etc. We have two whole sections of articles dedicated to these “meta” skills if you are interested. Check them out here

Career Advice — for those in the corporate world
Business Tips — for those in the business world

The only problem with this situation though, is that you are still quite dependent on that one source of income. If for some reason something were to happen to that income source (or to you, rendering you incapable of continuing to earn money from that income source), you will be back where you started – living hand-to-mouth, or living frugally, or worse, in a debt-trap.

A defense against this is to hedge your bets. Diversify your income by adding one or more additional sources of income – which is option (b) I mentioned above. This is what your situation would then look like.


Typical "multiple streams of income" scenario

This is your typical “multiple-streams-of-income” situation. From my reading of the personal finance blogs, this is the part which I see is most under-represented.

Most people think it is not possible to keep adding taps at the top. I used to think so too. But now that I have got started on this path, let me tell you, it is not easy (not by a far stretch of your imagination), but it is by no means impossible either.

If you find something that resonates with you, you will find a way to put it in action, in spite of having a family and/or a full time job and/or being a student and/or not having enough start up money and/or <whatever the excuse>.

In my case, it started out as a way to revive what was a dormant old personal finance blog – and here I am, with a site that really makes me happy, and modesty aside, quite proud. I spend around 10-15 hours a week on it, and outsource a lot of the aspects I don’t like or am not good at. It makes a little bit of money – nothing to brag about, just enough to cover for the outsourcing cost – but watch me, and in a few months/years I will be updating this paragraph to say otherwise. And as an added bonus, I am learning a whole world of new and exciting things, and meeting a whole new crowd of new and exciting people. So, instead of “adding” more stress to my life, this “project” is something I have started looking forward to as a means of “unwinding” at the end of a busy day!

Blogging (or building a website) not for you? No problem. There are a gazillion other ways you can harness your creative energies. Explore our massive archive of ideas for different ways you can make some extra money, and I am sure you will find something that works for your particular situation.

Money Making Ideas

Coming back to the personal finance situations that we were talking about, when you put it all together – i.e., earn more and spend less – you should have some (or a lot of) money left over to save. This is what that would look like.


Now, we're talking...

This is your “perfect-personal-finance” situation. You are no longer entirely dependent on a single source of income – if push comes to shove, you have some savings to dig into, and the “extra” income to supplement it. You curb on your spending so you do not leak away all your earnings.

You could stop right here and you would still be ahead of 90% of the people around. Believe me.

But hey, being in the top 10% isn’t enough for some of us. We fantasize that we will some day be even more ahead of the game….you know… retire early, more time with family, do what I love instead of what pays,  etc. — something like this 😉


Ahhh... Financial Freedom!

This is your “financial-freedom” situation where your side income projects earn you enough to pay for the daily expenses and possibly even keep adding to your savings, while at the same time there are enough savings built up already that you don’t have to worry about having a “day job” anymore.

To get there, I highly recommend that you stay tuned to the articles we publish to nurture the entrepreneurial spirit in you, to take the side income streams and turn them into massive gushers. They are part of the business tips section – yes, the same one I recommended earlier for folks with business as their primary income. What is your side-income project but for a business run on a different scale and a different pace? The moment you realize the crucial point, that your hobby is indeed a business, you approach it differently and that’s when you get started on turning the trickle (or a drought) into an overflowing flood. Check out what we have so far here

Business Tips — for your side income projects

So, what do you think?

Are you are you on board?

Ready to start building an ocean starting with a few tiny droplets?

Join me and a small group of other equally-crazy dreamers by subscribing to the blog, signing up for the newsletter, commenting, interacting and sharing. Slowly, but surely, we’ll get there – I have no doubt about that!

Illustrations for this article were provided by Mike Davenport of Stick Figure Simple. I found out about Mike and his mission to “help people find clarity and get their message across —using simple drawings” on an online forum. On a whim, I decided to contact him. He was amazing to work with and I can’t recommend him highly enough, if you are looking for illustrations for that all-important article on your site (or for a brochure, or presentation….)

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