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Saturday, March 30, 2013

Universal Rule of Personal Financial Management: #2 - Earn More

The first universal rule of personal financial management is to spend less than what you have earn, but that alone is not enough. It is good for one to be able to control his or her own temptations from the materialistic world. However, as we know that the inflation actually drives a lot of things to become more expensive, hence living within means will not be sufficient.

The next universal rule of personal financial management is to earn more. This one is a little bit more tricky than spending less than what you have earn especially for the working class because the salary is limited to what companies can offer. Even if this rule is not easy to apply to our life, we should really plan and think of the ways to earn more.

There are reasons why earning more is important, in fact, it is as important as the rule number one which is to spend less than what you earn. Companies which are focusing on cost control will doom to fail in the future because there is no growth in the company, the same applies to individuals, only different is companies without growth can still sustain, unless there is a real threat from the competitors.

On the other hand, individuals without competitive growth will face threat mainly from inflation making his or her purchasing power lower from year to another year. Purchasing power can be easily reduced to half every ten years, assuming the inflation rate is 7%. So, if one is spending just 25% of his or her income, he or she will need to have forced savings of 50%, and don't forget healthcare expenses can only go up and most medical insurance if not all cover up to about 70 years old.

There are many ways to earn more and when I mention earn more it means earning more linear income only. Linear income means the income you get from doing something, and in most cases is our work. There is another type of income which is the passive income, in which I will only discuss in the next blog post.

The simplest and most direct way to earn more is getting promotion at work. Other ways of increasing linear income is by getting more knowledge by further study or taking external professional papers or even by working experience. These knowledge can then turn into linear income by providing freelance service to others with the additional knowledge and time that one has. Finally, changing field might sometimes be the most effective ways for one to earn more linear income by fully utilizing his or her talents.

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