There’s a basic finance principle that many people get wrong, and it’s a costly mistake! We help you understand this key concept.
Which is better – a $100 decrease in costs or $100 increase in income?
It’s always good to increase our income, but more people get in trouble on the cost side. This applies to your business as well as your personal finances.
Assume that you own a retail store. Every product in your store sells for $100 and costs $40. So you keep $60 every time you sell a product.
Now let’s say you’re able to cut your expenses by $100. You get to keep all of it!
So, which is better? Cutting expenses by $100! That yields $40 more!
Now, you may ask, how do you do that? Here’s something we have learned …
As you get busy running your business, it’s easy for costs to creep in that aren’t increasing sales like you thought they would. Get rid of these costs!
One of the biggest complaints bankers have about small business people is that they are too focused on their top line (sales) and they don’t spend enough time thinking about the bottom line (profit).
In the long run, your profit can only grow as fast as your sales. But in the near-term, your bottom line will grow much faster if you keep a close eye on costs.
Your personal finances
This is the same story, but for a different reason. It’s all about taxes.
Let’s assume that you will pay 30 percent on your next $100 of income. So, if you make $100 more, you get to keep $70 after taxes.
But if you can spend $100 less, you’re $100 ahead because you’ve already paid the taxes on that money!
Let’s say you get a $5,000 a year pay raise. You decide to celebrate by buying a new house … you upgrade! Your mortgage payment is now $4,800 a year higher than it was before. But hey, you have $5,000 more income, so you’re still $200 ahead, right?
That’s BEFORE TAXES.
Once we factor in 30 percent for taxes ($1,500), you’re $1,300 behind!
And the bad news has just started. This new, bigger, more expensive house probably has higher property taxes; it costs more to insure; it requires more repairs and maintenance.
Before you know it, you’re $5,000 in the hole – what a costly mistake!
What should you do with the raise?
Once again, your specific situation will determine what you should do. Consider giving yourself a SMALL reward – you’ve earned it! Then, if you have any debt – particularly credit card debt – pay that off because your return will exceed almost any investment. And it’s a guaranteed return!
Once you have that debt paid off, the money becomes yours! Now you can invest it in things that will 38 jump start your passive income].
The bottom line is this – you have complete control over your expenses. You have to convince someone to say “yes” to make a sale or get a raise. It’s much easier to control your costs!
You’ve probably heard our BIGG quote today, but it was so fitting that we used it anyway. Here’s Ben Franklin –
“A penny saved is a penny earned.”
And we bet that, if ole’ Ben Franklin was around today, he’d think about the taxes he was paying and modify his quote to – A penny saved is BETTER than a penny earned!
Next time, we’ll continue the money talk, but with a twist. Comedic writer Jake Novak joins us to share his “Top 5 Signs You’re Managing Your Money Like Wall Street.” Until then, here’s to your BIGG success!
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