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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.

Thursday, March 14, 2013

Universal Rules of Personal Financial Management: #1 - Spend Less Than You Earn

While I'm planning for this year financial goal, I realized that there are certain rules for personal financial management which won't go wrong to almost everyone and at any situation. In fact, I found that these rules are so real and these rule are so simple that we all know deep inside of us, but whether we can apply those rules in our life will be another story.


Well, the first and most basic rule of personal financial management is to spend less than what you earn. When we look at this rule, we would have think, "Oh come on, everyone knows this". True, spend less than what you earn makes much sense as we cannot spend the money that we don't have - provided we do not own a credit card. Once you have a credit card, it is very easy and tempting to spend more than what you can earn, and before you realized, you have already swiped up to the credit limit, which can be up to two to three times of your monthly salary for most cases.

Spend less than what you earn is the most fundamentals rule for personal financial management and in fact, if you are getting the advices from almost every financial planner or financial gurus or even wealth manager, this is something that you are most likely going to get because it is true and most fundamental. Successfully applying and mastering this rule will lead to one to be debt free and having extra money for savings and investments.