Monday, January 1, 2007

Formula to be rich!

This is a simple formula to earn wealth

Earning wealth = Money earned - Money spent

Earning money is income earned from job, business, real estate and investments (stocks/bonds/mutual funds)
Spending money is daily/monthly/yearly expenses including house rent, utilities, food expenses, entertainment expenses and all other expenses

This formula sounds very obvious but many people under-estimate its importance. If either "Money earned" or "Money spent" gets messed up, you are in a financial mess. A person might think that Earning money is the only thing that's important but if you have bad spending habits, you wont save any money. Simultaneously a person might spend only a small percentage of his income but is his income is very small, that wont help his cause either

These are some things that I recommend to earn wealth
Money earned
  1. If you are working in a company, work hard so that you can get a good bonus, stock options and a salary raise
  2. You can also earn some experience in the current company and then start working in a different company that offers a better salary and perks
  3. Start your own business.
  4. Have an alternate source of income like a money generating website and income from real estate
  5. Invest in stocks, mutual funds and bonds.
  6. Invest in 401K, IRA as much as you can
Money spent
  1. Track your expenses. Many people don't track their expenses thinking that their spending habits are proper but I think that's a big mistake. All of us have some areas where we have bad spending habits
  2. Buy Microsoft Money or Quicken to track your expenses. I use MS Money & I am a big fan of it
  3. When you identify that you are spending much more that you should on a specific area, make a conscious effort to control your spending habits on that area. If you spend way too much on a Starbucks coffee, you might think of buying a coffee machine & making your own coffee or you can drink the not-so-good but free coffee in your office
  4. Take good care of your health. There is no better investment than keeping good care of your health. Do a complete physical check up once a year, visit your dentist and eye doctor once a year.
  5. Optimize your taxes. This is the single biggest expense!
  6. Make your own lunch. Eating out is expensive
  7. Negotiate, ask for a deal; you can save a lot if you bargain plus you have nothing to lose

Finally, realise when not to be a cheapskate. Its foolish not to go to a dentist to save money only to realise later that what could have cost 100 bucks now costs a few 1000 bucks!

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