At the beginning
simplest financial equation. The financier it sounds proud. The one who studies finances is definitely someone, who will automatically achieve success, of course financial one. I admit, that I was simplified myself in that way. Long ago, finance appeared to me as a magical piece of knowledge, which is the key to wealth and, of course, independence and freedom. Knowledge of finance was something particularly attractive, worth getting to know. Of course, I saw, that this area is related to a lot of mathematics, a lot of models, a lot … just a lot of difficult, complicated knowledge. Hmmm. I was wondering, how many books I should read, learn how many tasks to convert.
Passing time has shown me that finance is easy. Easier than it seems. Don’t get me wrong, but I think super complicated investment models in financial engineering are not more effective, than the simplest methods of making money. You will soon read about it on the blog, why this is so.
Personal finance as part of wider finance is expressed in the understanding and application of one simple law. Thinking about wealth refers to the principle of spending less than you earn. All you need is his simple image expressed in a pattern. Simplest financial equation
Wealth (Savings) = Revenue – Expenses
Some say so, it’s obvious, but there is still time that plays a key role. Wealth will not be built in this way in two months. I agree, but if this action repeats for 10 years then the picture improves. The equation shows very simple dependences. Let’s assume that the main goal is financial independence.
What to do then?
If you spend more than you earn, you move away from your goal, finally you will probably go into debt. However, if you earn more than you spend, you accumulate wealth. The greater is the difference between earnings and expenses, the faster you accumulate wealth. So, to achieve wealth there are only two methods to spend less and earn more. Spending less is something you can do now with little or no effort. Just stop spending money. That’s all. Start budgeting your expenses. Set goals. Plan expenses. Do not buy unnecessary items. Of course you have to buy, but learn how to pay, pay for things less, or correct your needs. In this way, you can cut expenses, as you will discover, by a shocking amount. Making money is the other half of the wealth equation. If you can increase the amount of income, do it. It doesn’t matter how you do it, whether it be your job or the business you run.
It may seem petty, but smart personal finance is really simple: spend less than you earn. How do you do it, will you pay yourself first, save 10% of your income, invest smartly and successfully – you’ll be reaching your dream goal. After understanding the concept of the equation presented and applying its banal principle, financial decisions become simple and obvious.
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