Sunday, February 13, 2011

The first half of the first rule of personal finance.

John Doe is trying to save money. He would like to buy a house one day. He would like to retire one day. He cannot do this if he is not earning money. If he does not earn money then his net worth will definitely not increase, and, unless he is still living in his parents house, it will most likely go down. This brings us to the first part of the first rule of personal finance.

Earn Money.
This may seem obvious to some of you, but that's normal. Most rules of personal finance are obvious. "Earn money" is only one half of the first rule of personal finance. It does not specify how much money should be earned nor does it specify how quickly. This not important for now. The important thing thing to keep in mind is that:

The greater the rate at which one earns money, the faster he will achieve his savings goal.

This is easy to understand if we think back to our John Doe example. Lets say John Doe lives in his parents house, and all of his living expenses are paid by his parents. (Living expenses are very important to consider and will play a key role in the second half of the rule). John Doe would like to save 20,000 dollars for a down payment on a new house. If he earns money at a rate of 100 dollars per day he will reach his goal in 200 days. Now if he doubles his earning rate to 200 dollars per day, he will reach his savings goal in only 100 days. That's half the time it would have taken him at the slower rate! All of this doesn't take into account living expenses. Spending will be discussed in my next post in which I will explain the second half of the first rule of personal finance.

I'm looking forward from hearing from my readers in the comments. Does anybody know any good techniques for earning money?

1 comment:

  1. You must think your readers are really stupid