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Reading and wRiting and aRithmetic

Written on August 19, 2009 by admin in Personal Growth

It’s Back-to-School season so we’re doing a ten-part series on lifelong learning. We’ve kicked it off with two shows on reading and writing. Now we want to talk about arithmetic.

We’re going to take a little different tack today than we have with the last two shows. We’re going to talk about two specific things we need to know when it comes to arithmetic.

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These two things both involve our personal finances. That’s why they’re so important.

The power of compounding money

The first one is compounding. This can be a little complex so we’ll offer an example that’s so simple we won’t even need a calculator!

2 + 2 + 2 = 6. 2 x 2 x 2 = 8.

If we add two together three times, we get six. If we multiply two by itself three times, we get eight.

That’s the power of multiplication. And money multiplies if you manage it properly.

Stuffing it in your mattress

That’s just numbers. Let’s apply it to money to make it more tangible.

Let’s say you have $2. You stuff it in your mattress. Next year, you get another $2 and put it in the same mattress. The year after that, you do the same. Now you have $6 in your mattress.

But you haven’t earned any money on your money.

Investing it

Let’s assume that you could double your money every year. Now understand that we’re just doing this for the purpose of illustration.

We don’t know of anything you can invest in and double your money every year. If there was such an investment, it would likely involve taking a whole lot of risk.

So you start with the same $2 that you did before. Only now you invest it and earn 100% on your money each year. Instead of $6, you would end up with $8.

And you only invested $2 one time!

If you invested all $6 at the times suggested above, you would have $14 at the end of the period.

That’s the power of compounding interest. It’s how interest works for you.

But it’s a two-edged sword. It can also work against you. We’ll talk about that more in just a minute.

Building Net Worth

The second thing to understand about arithmetic is the basic accounting equation:

Assets – Liabilities = Net Worth.

Of course, our goal is to increase our Net Worth. If we understand this basic equation, we can quickly see there are only two ways to do that.

We increase Assets faster than Liabilities

We decrease Liabilities faster than our Assets are decreasing

Let’s look at the extremes to keep it simple:

If we increase our Assets without increasing our Liabilities, our Net Worth increases.
If we decrease our Liabilities without decreasing our Assets, our Net Worth increases.

A painful vacation

Let’s get away from words and look at something tangible. Let’s say you borrow money to go on a vacation.

You don’t increase Assets at all but your Liabilities increase. So your Net Worth goes down. You lose financially. You may reap psychic returns but that’s a different post!

It’s the pain we talked about earlier. You have to pay for the vacation over time. You also have to pay interest on the money you borrowed. This is a situation where compounding works against you.

So what’s the key?

Find ways to increase Assets without taking on more Liabilities or invest in Assets that earn a return higher than the cost of your debt.

Money multiplies if you manage it right. That’s a path to bigg success!

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In case you haven’t heard, there’s a fantastic new book out. It’s called Trust Agents by Chris Brogan and Julien Smith. This book shows you the path to grow and maintain the most important asset you can possess today, your network.

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Thank you so much for checking in with us today.

We’ve talked about the 3 R’s we learned in school. Please join us next time when we begin talking about the 3 R’s of bigg success. Until then, here’s to your bigg success!

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Tags: accounting, arithmetic, assets, audioblog, bigg success, compounding interest, george krueger, liabilities, lifelong learning, mary-lynn foster, Money, net worth, personal finances, podcast, risk, the bigg success show

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6 Paths to Financial Freedom

Written on July 2, 2009 by George Krueger & Mary-Lynn Foster in Financial Freedom

freedom Today is the fourth installment in our freedom series. We’ll focus on financial freedom.

Financial freedom … can you imagine it? To use the lingo from our last couple of posts, it means freedom from money worries or, even better, freedom to choose how we spend and live.

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Financial freedom is just one piece

We’ve defined bigg success as life on your own terms. There are five elements of bigg success – money, time, growth, work and play. Bigg success comes faster when these five elements work in synergy; that’s part of the bigg idea behind bigg success.

So while financial freedom is a worthy goal, be sure you’re looking at it as part of the bigg picture. What does life on your own terms mean to you? Only you know the answer that’s best for you.

Framing financial freedom

You are the entrepreneur of your own life. As the entrepreneur, you need to understand the two basic financial statements: your Income Statement and Balance Sheet.

The Income Statement shows how much money you brought in the front door and how much money went out the back door. Financial freedom means more income and less costs.

The Balance Sheet shows how much you own (your Assets) and how much you owe (your Liabilities). Financial freedom means more Assets and less Liabilities.

6 ways to define financial freedom

Debt free

There are variations of this. You may consider yourself free if you don’t carry a credit card balance forward from month to month. Other people want everything paid off except their house. For some, they want no debt period.

You focus on the Liabilities side of the Balance Sheet with this path. You want to minimize what you owe. Better yet, owe nothing.

Low standard of living

Some people take this to an extreme, but they’re the only ones who have to be happy with it. This is a very simple, yet proven path. Focus on spending less so you’re free to spend the excess money however you want.

Obviously, this path focuses on the Expense side of your Income Statement. “Low” is a relative term; it means low relative to your Income.

High salary

Conversely, you can focus on making a lot of money. Make a lot more than you spend and you’ll feel free financially.

We called it “salary” but it can be active income from any source – commissions, business ownership and the like. Obviously, we’re on the Income side of the Income Statement here.

Cash in the bank

If you have an amount equal to three to twelve months of living expenses in the bank, you may feel a sense of financial freedom. It doesn’t have to literally be “in the bank.” For example, you may have the money invested in a money market mutual fund.

This is a Balance Sheet strategy focusing on Assets, specifically Cash and Cash Equivalents.

Retirement nest egg

Here you get that sense of financial freedom by having enough money stored up to allow you to live comfortably, without working, for the rest of your life. Your focus is on building up the Asset side of your Balance Sheet. Unlike our third definition, this path is about building passive income from these Assets.

Wealth-creation

For some people, financial freedom means being wealthy enough to buy anything they want. There are a lot of degrees here. “Everything you want” doesn’t have to mean a jet or a yacht, but it can if that’s what you really want!

This is a complex path. You’ll probably need to manage both sides of the Income Statement and the Balance Sheet. You may not try to minimize Liabilities; instead, you’ll focus on having Liabilities that have paid for Assets that make you money.

It’s important to define financial freedom so you can determine your goals. With your goals in mind, you can develop strategies to achieve them. That leads to bigg success!