“Do not save what is left after spending, but spend what is left after saving. If you buy things you do not need, soon you will have to sell the things you need.” — Warren Buffett

I was wondering whether I should persist with the Personal Finance sub topic of the Finance series I started a few weeks ago. Then I found this short but interesting article on lifehacker.com, entitled The Two Simple Equations That Lead to Financial Success.

I know many MBA Forum readers after last week’s article may think that I don’t have my feet planted on terra firma because I am advising that people save more and spend less. Comments like these would be flying about: “You mussi doan live in Jamaica,” or “You must get pay over one million dallaz a week!” (I wish!) Or even, “How me mus save anyt’ing outa my likkle pittance!?” So are you telling me that if general income levels in Jamaica improve, then the savings and investment levels would jump? Well, I hope so — but the evidence in other countries does not support this wish!

Let me invoke some perspective, since we generally think that “yeah, we are a third world country” and “that would not be the same as if I were in America” etc. A survey done in America (from the same article cited earlier) indicated that 70 per cent of Americans are either struggling or going backwards financially. Going backwards means that each time they get paid, their expenses are more than those earnings — so they fall deeper and deeper in debt. To complete that perspective, the per capita GDP of Jamaica is about US$8,600 versus US$54,400 for the United States (CIA World Factbook — 2014 estimate), a six-time multiple of ours!

Let us review the other side of this story. Last week I indicated that we had a whopping JA$30.5 billion total credit card debt in Jamaica, equating to a per capita credit card debt of about US$90, compared to a per capita credit card debt of about US$2,700 for the United States. I think you realise where I am going — if the income levels are so much more than ours, why should the debt levels be even so much more? Does it also mean that if the average income in our country increases — then the average credit card debt would increase even more?

According to our reference article from lifehacker.com, successful personal financial management boils down to only two equations. I know the word “equation” is enough to send some with maths phobia running and screaming down the road — but please don’t take off, it is not that bad! By the way, why is it that so many people are so absolutely scared of mathematics? The subject should be intuitive as it surrounds you every day. I think, though, that a high percentage of students became enemies of maths from an early age because of the lack of competence of those trying to impart the subject, when sometimes the teachers themselves don’t have a clue about the basic tenets of what they are trying to teach. They actively create mind blocks in their students who develop a morbid fear that only a psychologist can subsequently blast away!

Sometimes it is because of the teaching methods — let me give you an example. I was in a conference overseas with hundreds of participants some years ago where this professor in maths was using animation to demonstrate the relationships among a circle, a triangle and a sine wave. Back in school when I did A’ Level Maths I had to remember (well swot!) Sin 30, Cos 60 and the values of a host of other functions. At the conference were some Jamaican educators, persons with PhDs and even one of our former ministers. When the presenter fired up his animation and started showing the arc tracing out the patterns, there was — at the same Eureka moment — a collective “Ohhhhh…” What happened? In one brief session — using a computer with some animation, the professor suddenly “turned on the light” and we saw how simple the concept was — and simultaneously realised how complicated some maths teachers had made it out to be!

OK, I did digress from the main point a little – but I hope the brief detour assists someone.

So let us get back to the point. According to our lifehacker.com article, the two equations are:

Income — Spending = Surplus

Surplus X time = Wealth

Wow, so all those really big books on personal finance, and all those magazines and finance TV shows can boil down to these two equations? Well, it may be simplistic to answer “Yes” to all those questions, so let’s put it this way — if you line up your personal finance based on these two equations, you would be well on your way!

I am going to start very basic. If you get a job and you were not working before, or if you are able to increase your income, then in both cases you have room to save. As long as the income is more than the basic amount required to survive, then if you follow the first equation, you can ensure that you spend less than your income.

I see some workers complaining that they have no money, and worse have none to save, but when I look I see them with the most expensive smartphones, the latest fashion accessories, and when they arrive at work they buy expensive breakfast, lunch (with juice) and some of them eat out for dinner. That can easily translate to thousands of dollars that could otherwise be saved. What is so wrong with fixing a sandwich for breakfast and putting aside some of last night’s dinner for today’s lunch? …Oops, sorry, that is too “old-fashioned!” Well then — stay broke!

If you were not born rich, then the only way to have a “little something” is to save, and then invest what you save. I have been talking about debt only in a negative way, but there is good debt. Jamaica typically has a higher than ideal inflation rate. One way to beat inflation is to buy property — or borrow other people’s money and buy property.

Young people, as soon as you can, go to NHT, or a building society, get pre-approved, and buy a house. It may not be a dream house, but as long as the area is not unsuitable, you will not regret it. I remember my father boasting that “inflation paid for our house”, in reference to the brand new house he bought in Portmore for $33,000 when I was a child. And yes, that is not a typo — thirty three thousand dollars! About 10 years ago my wife and I bought an acre of land in Red Hills (with city view) for $1.5 million. Recently we saw a piece near ours without any view selling for $6 million!

I got this wisdom years ago when as a youngster I was telling my boss how a co-worker of mine bought this really fancy car. My boss’s only comment was, “‘im have house? Cyaan sleep inna car!”

Dr Kenroy Wedderburn is an MBA part-time lecturer. Send your e-mails to drkwedderburn@gmail.com.