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.
The Power of Profit Margin
"Be industrious and frugal, and you will be rich." — Benjamin Franklin
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:
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:
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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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.