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My name is J.D. Roth. Ten years ago, my financial life was a disaster. Instead of waiting for things to get better, I decided to become boss of my own life. The results were remarkable. Now I want to help you master your money — and your life.

J.D. Roth

The Power of Profit Margin

"Be industrious and frugal, and you will be rich." — Benjamin Franklin
There is power in profit.

Profit is the lifeblood of every business. It's like food and water for the human body. Although proper nutrition isn't the purpose of life, we can't exist without it. Food and water give us the strength we need to do the things that bring us meaning. Similarly, profit isn't the purpose of business — but a company can't survive without it.

People need profit too, although we usually call it "savings". If you're living paycheck-to-paycheck — or worse, sinking into debt — you'll find it impossible to accomplish the goals you've set for yourself. Plus, today's profit (or saving) acts as a safeguard to protect you against an uncertain tomorrow. It also provides flexibility, giving you more options and allowing you to seize more opportunities.

But what is profit?

Profit is simple to calculate. It's your net income, the difference between your revenue and expenses. If you earned $4,000 last month and spent $3,000, you had a profit of $1,000. But if you earned $4,000 and spent $5,000, you had a loss of $1,000.

This idea is expressed by a simple formula: PROFIT = INCOME - EXPENSES

If you spend more than you earn, you're operating at a loss; you're losing wealth and in danger of going into debt (or, if you're already in debt, you're digging the hole deeper). If you spend less than you earn, you're producing a profit and building wealth, which can be used to pursue your goals.

Your net worth is the accumulation of years of profits and losses. The greater the gap between earning and spending, the faster your net worth grows (or shrinks). This may seem obvious, but it's important. Everything you do — clipping coupons, saving for retirement, asking for a raise — is done in support of this basic idea.

Because this equation is so simple, there are only two ways you can boost profitability:

  1. You can spend less. A business can increase its profit by slashing overhead: finding new suppliers, renting cheaper office space, laying off employees. You can increase your personal profit by spending less on groceries, cutting cable television, or refinancing your mortgage.
  2. You can earn more. To generate more revenue, a business might develop new products or find new ways to market its services. You might earn more for yourself by working overtime, taking a second job, or selling your motorcycle.

All financial advice is based on the fact that these are the only two ways to boost your profit. You must spend less or earn more. There are no other options.

When you begin to earn even a small profit, the balance of power shifts in your favor. With a profit, you don't have to worry how to pay your bills. Profit allows you to chip away at the chains of debt. Profit removes the wall of worry and grants you control of your life.

Note: This is the callout box that I use in so many posts. It needs to have a class name of "highlight". It's a place for me to put parenthetical thoughts and added information. There'll be a similar box at the bottom of this article for "action items".

How much profit do you need?

Most financial advisers urge people to save 10% of their income. The bold ones recommend 20%. Profit margins like this are small enough to seem achievable yet large enough to allow you to pursue your goals (albeit slowly). Saving 10% or 20% of your take-home pay is not a bad thing — but you can do better.

In what Mr. Money Mustache calls the shockingly simple math behind early retirement, if you make some standard assumptions about inflation, withdrawal rates, and investment returns:

  • A 10% profit margin (or saving rate) means you'll have to work about 45 years before you can retire. (Thus the reason many people retire at age 65.)
  • With a 20% saving rate, you'll have to work for about 35 years before taking "early" retirement at age 55.
  • But with if you save 50% of your income, something amazing happens. You only need to save for about seventeen years. You can achieve Financial Independence before you turn forty!
  • And if you have a personal profit margin of 70%? The folks who do this — and they exist, trust me — are able to quit working after only a decade.

Your profit margin affects how quickly you'll achieve your goals. A profit margin of 20 percent will allow you to reach your destination twice as quickly as you would with a profit margin of 10 percent. But if you can save 40 or 60 percent, you'll get there even quicker.

Action Items: This is the new "action items" div style. It's a place for me to place action items at the end of articles. These are the things I want the reader to do after absorbing what I've said.
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Hey, Klong. I can't figure out how to get the layout I want in Aweber. I want something similar to the above, but I can't figure out how to layout the input fields side by side instead of stacked. The Aweber form code has been commented out in the HTML.

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J.D. Roth

My name is J.D. Roth. Ten years ago, my financial life was a disaster. Instead of waiting for things to get better, I decided to become boss of my own life. The results were remarkable. I'm here to help you master your money — and your life. Read more.

Money Boss 101

The Power of Purpose

The Power of Profit

Get Out of Debt

Make More Money

Stock Market Basics

Financial Independence in Plain English

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