It was 12 years ago when I earned my first salary from formal employment in Kenya. Of course before then when I was still a student at the University, I used to make a few coins from other skill based business activities here and there including but not limited to playing basketball and deejaying.
One thing that I have been able to consistently do throughout this period is to account for each single coin, by this I mean that I would literally record all the income I earned from my 8 – 5 job plus any other sources and at the same time record all the expenses incurred during my day to day activities.
As an Economist and Certified Public Accountant (CPA-K), I understand the importance of keeping track of your finances. Whether you’re just starting out in your career or planning for retirement, tracking your income and expenses is crucial for achieving long term financial success.
Income and Expenditure
In economics, the income-expenditure identity states that total income (Y) must always equal total expenditures (E) in an economy.
This identity can be expressed mathematically as:
Y = E
By applying this same principle to personal finance, you can ensure that your income is being used efficiently and that you’re not overspending.
Budgeting
Keeping a detailed record of your income and expenses can also help you to identify your spending habits and adjust your budget accordingly.
This can help you to reduce your expenses and increase your savings, which can be invested in other areas of your financial portfolio.
The budget equation can be expressed as:
Savings = Income – Expenses
Propensity to Consume
In addition, the marginal propensity to consume (MPC) is a key economic concept that can be applied to personal finance.
The MPC measures the proportion of additional income that is spent on consumption, and can be calculated by dividing the change in consumption (∆C) by the change in income (∆Y).
This can be expressed mathematically as:
MPC = ∆C/∆Y
By reducing your MPC for discretionary spending, such as dining out or entertainment, you can increase your savings rate and invest in other areas of your financial portfolio.
Present Value & Savings
The present value of an annuity is another economic concept that can be applied to personal finance.
The present value (PV) of an annuity calculates the current value of a series of future payments, and can be useful when planning for major expenses, such as a down payment on a house.
The formula for calculating the present value of an annuity is:
PV = Pmt * [(1 – (1 + r)^(-n)) / r]
Where:
Pmt = Payment per period
r = Interest rate per period
n = Number of periods
By determining the present value of your monthly savings, you can calculate how much you need to save in total to reach your financial goal.
Use of Technology
Technological progress, which refers to advancements in technology that increase the efficiency and productivity of an economy, can also be applied to personal finance.
There are many digital tools available, such as spreadsheets and personal finance software, that can help you to manage your finances more efficiently and reduce the time and effort required to do so. I have personally used an application called Book Keeper for over 10 years now and it has served me well.
Credit Rating
Lastly, it is important to review your credit report regularly to ensure that it’s accurate and up-to-date. Your credit report is a record of your credit history and is used by lenders to determine your creditworthiness.
By reviewing your credit report, you can take steps to improve your credit score if necessary. This can increase your access to credit and reduce your borrowing costs.
Conclusion
In conclusion, tracking your income and expenses is a crucial part of financial management. By applying economic concepts to personal finance, you can ensure that your income is being used efficiently, reduce your expenses, and increase your savings.
Whether you use a simple ledger or a sophisticated personal finance software, the most important thing is to be consistent and keep track of your income and expenses on a regular basis. This can help you to make informed financial decisions and take control of your financial future.
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