Friday, April 25, 2014

Three Solutions to The Money Equation

There is no one size fits all solution to your money problems. The possible solutions are ultimately only limited by your imagination. However for any of them to actually work in this material world, they must satisfy the money equation. That is not always easy.

Money In = Money Stored + Money Out

People in our culture tend to focus on Money In. If only I had a better job that paid $XX, XXX or even $XXX, XXX dollars a year, I would be happy and all my money problems will be solved. Well maybe? Maybe not if you forget about the right hand side of the equation. Many doctors earning significant six figure incomes have relatively low net worths because they spend it as fast as it comes in. Many professional athletes have been bilked out of millions by questionable investment advice (Money Stored) or the expense of a posse of “friends” who are very willing to spend their home boy’s money until it is all gone. Generally speaking, the left hand side of the money equation is where we find our big wins. Jumping your annual income by $10,000 a year can buy a lot of $5.00 lattes at Starbucks. Can you by education, by working harder, by working longer, or even by working smarter think of a way to juice the left hand side of your money equation?

In retirement making your money work for you instead of working for your money is the name of the game. Focusing on Money Stored becomes very important. However, every adult, no matter what age, needs to calculate his net worth every month. Through a combination of savings and investments a portfolio of $1,000,000 can realistically be accumulated by an average American family willing to avoid the debt trap. There are people who have no other job than focusing their attention on Money Stored. They are call investors. While it is unlikely that you will become the next Warren Buffet, you can make your money work for you. Then with a lot of hard work, some self control, and a little luck (blessings of our Lord) the day will come when you will find financial freedom. You will no longer need to work for a living. You will be able to work at your calling, whatever that might be.

Frugality (Money Out) is an important factor in reaching financial freedom for most of us. If we do not watch and control where our money is going, there are plenty of people who are watching our money. They are only to willing to take it from you. This is where the dreaded monthly budget forces us to project and then control how we use our money.

Why do I see a hard hearted, flinty eyed old man waving his cane at me while pronouncing, “A penny saved is a penny earned.” Actually given taxes a penny saved is more like a penny and a half earned, but let’s save that rant for Facebook.

There is no question about it, the formal zero balance budget is the gold standard. If you are in trouble, use it, at least to you are out of trouble. Hopefully, by that time you will have learned enough good money habits that will stick with you if you decide to use one of many budgeting variants that fall short of the full court press zero balance budget.

The bottom line is the bottom line. If more money is coming in than is going out, your net worth is increasing. That is good. If more money is going out than is coming in you will ultimately find yourself in world of hurt.

No comments:

Post a Comment