Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006. J.D.’s non-financial writing can be found at More Than Money, where he recently wrote about how to be happy.

Be Your Own CFOAfter six months of work, my guide about becoming the Chief Financial Officer of your own life is ready for launch! Be Your Own CFO will be released on April 22. Over the next couple of weeks at Get Rich Slowly, I’ll share some background on this project, including excerpts and outtakes. Today, for instance, I’ll give you a taste of what I’ve written about the importance of profit.

The overall theme of my new guide is that people would have greater success managing their money if they acted as if it belonged to a business. I think most of us understand that companies can’t exist without profit. But for some reason, people don’t practice this concept in their personal lives — even though the same principle applies!

The importance of profit
Profit is the life-blood 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 pursue the things that bring us happiness and meaning. Similarly, profit isn’t the purpose of business, but a company can’t survive without it.

What’s the purpose of business if it’s not profit? It varies from company to company. Harley-Davidson says it exists “to fulfill dreams of personal freedom.” Nike wants to “bring innovation and inspiration to every athlete in the world.” Perhaps the most notable example of a company that doesn’t put profit first is Apple, which has taken a lot of flak on Wall Street recently because it “has to” release a new product or risk becoming irrelevant. Apple lets the pundits squawk and quietly pursues its purpose. Meanwhile, they continue to make money.

Companies that forget (or ignore) the importance of profit often become unable to meet their goals. Instead of pleasing customers or developing new products, they find themselves in a struggle to survive. A good Chief Financial Officer aims to maintain and maximize profitability.

Individuals need profit too. 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 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. What’s more, you can invest a profit, growing the money for future needs, such as retirement.

The bottom line: To fulfill your dreams, you must earn a profit.

Calculating 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

Since the beginning of this blog, I’ve called this the fundamental equation of personal finance. 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:

  • 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.
  • 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.

The power of profit margin
A company without profit has lost directionWhile it’s helpful to track profit as a raw number, it’s even more useful to track profit margin, which measures a company’s profit as a percentage of its income. For instance, if a business had a profit of $30,000 on $200,000 sales in 2013, the company’s profit margin would have been 15 percent.

In recent years, the average large American company has had a profit margin of roughly 9 percent. Although they vary by industry — accounting firms tend to have higher profit margins than manufacturing businesses — small businesses generally run margins between 5 and 15  percent.

In personal finance, the profit margin is called a saving rate, and it measures the percentage of your income that has been set aside to pursue future goals.

The economic definition of saving is “current income minus spending on current needs,” which is essentially the same definition used to calculate profit on an income statement! Unspent money is money saved. It’s profit.

Profit margin is a vital metric of business success, and saving rate is an important tool for measuring your personal financial progress. It might, in fact, be the most important number in all of personal finance. Saving (profit) over time builds wealth (net worth).

Finding your saving rate is simple. For any given period of time, divide your profit (total savings) by your total income. This number, expressed as a percentage, is your saving rate, your profit margin.

Note: According to the Organization for Economic Cooperation and Development, the average U.S. household saved 3.9 percent of its household income in 2012. That was better than Denmark (which had a saving rate of -2.3 percent) and Spain (1.9 percent), but worse than Australia (10.3 percent), the U.K. (7.1 percent), and Norway (9.4 percent). Canadians saved 4.0 percent of their income in 2012.

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.

How much profit do you need?
Most financial advisers urge people to save 10 percent of their income. The bold ones recommend 20 percent. Profit margins like this are small enough to seem achievable yet large enough to allow pursue their goals (albeit slowly). A savvy CFO will treat these recommended profit margins as only the beginning.

If you were to maintain a steady profit margin of 10 percent, it would take nine years to save enough to fund one year of living. (Or, to think of it another way, if you maintain a saving rate of 10 percent for nine years, you’ll accumulate enough to take one year off work.)

With a profit margin of 20 percent, it takes only four years of work to fund one year of expenses. With a 50 percent margin, you’re saving enough each year to fund another entire year normal spending! And at 75 percent, each year of work would fund three additional years. (Another way to look at this: After three months with a 75 percent saving rate, you could take the rest of the year off from your job — assuming your boss would allow you to return.)

This table shows the power of profit margin:

The power of profit margin
This table is taken directly from my upcoming Be Your Own CFO guide.

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.

The more you save, the more profit you generate, the sooner you can do the things you dream of doing.

This article is about Books, Savings

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After a long and brutal winter in parts of the U.S., warmer temperatures and sunshine are finally heading our way. And, although it doesn’t seem possible, an entire quarter of this year is behind us already. In most places, schools are out of session — at least for a few weeks — which means that families are taking their first major hiatus of the year. And everyone seems to be on Spring Break … except for you.

If you spend any time on social media, you probably know exactly what I’m talking about. Your Facebook and Twitter feeds are likely exploding with vacation updates ad nauseam. Sun-bathed selfies have become the norm, along with all those people “checking in” at their favorite resort or restaurant. And I totally get it. Vacation is fun, and people want to share their experience with family members, friends, co-workers, and random acquaintances. But sometimes they take it too far, and those hourly updates can become downright annoying in a hurry, especially if you aren’t in a position to take a vacation yourself.

Vacation Deprivation Syndrome: A widespread epidemic

If you’re feeling vacation-deprived, you’re not alone. A 2013 study by travel giant Expedia concluded that 59 percent of Americans and 62 percent of workers worldwide feel deprived of time off. And, it isn’t just due to lack of opportunity. According to the study, Americans only used ten out of every 14 vacation days they were awarded in 2013, leaving many as 577,212,000 unused.

But why?

The Expedia study highlights a few of the most popular reasons Americans often choose to forgo their precious paid time off. For starters, 27 percent of survey participants stockpile their vacation days for future use, perhaps for extended travel or maybe “just in case.” Another 24 percent have trouble coordinating vacation days with others, a problem I suspect is widespread among families with two working parents. A whopping 35 percent of Americans surveyed had to postpone or cancel vacation due to work obligations or deadlines, and another 17 percent chose to cash in their PTO and take the money in lieu of their earned days off.

Breaking the cycle

Even if you have vacation days and plan to use them, plenty of issues can force you to stay home. You know how it goes. You save up for a trip but spend the money fixing your leaky roof instead. Or, you find out your child needs braces and, as always, decide to put their needs ahead of your own. Life has a way of creating roadblocks when we least expect them, and we often end up sacrificing leisure activities in order to do the responsible thing.

Adulthood can feel rather unrewarding at times, but it doesn’t have to be that way. Fortunately, there is one way to ensure that your vacation plans take a higher priority than they have in past years, and that the funds are there when you need them. The solution: A vacation budget.

How to grow your own vacation fund

Creating a vacation budget is just like raising funds for anything else. You simply have to make it a priority and then take actionable steps to get there. Whether you can save a lot or a little, the first step is to get started right away. Want a vacation budget of your own? Here’s how:

  • Decide how much you can save — Whether you’re using a zero-sum budget or tracking your monthly expenses in some other way, you need to decide how much you can allocate to your vacation budget on a weekly or monthly basis. Once you figure out how much you can save, make sure to add the amount as a line item on your budget so that you don’t forget. Another way to ensure that your newly-created budget gets funded is to set up an automatic bank transfer once a month or on each payday.
  • Consider a targeted savings account — If you’re afraid of temptation, it might even be helpful to send the funds to an entirely new account. J.D. has written about the joys of targeted savings accounts before, and says the strategy allowed him to buy a new car, purchase new furniture, and finance a few trips of his own.
  • Find ways to cut back — Want to save even more? Most people can come up with at least a few ways to increase their savings, just by cutting back somewhere else. For example, you could probably stand to scale back your entertainment budget for a while, right? Or perhaps you would rather let your grocery budget take the hit. It’s totally up to you.
  • Add to the pot — Still not satisfied? If you want to grow your vacation budget in a hurry, you can always try to find ways to raise additional funds. Since it’s finally spring, now is the perfect time to start planning a garage sale. If a yard sale isn’t your thing, consider selling unwanted items on eBay or Craigslist, or finding ways to earn extra money on the side.
  • Leave it alone -- Once you begin making regular contributions to any targeted savings account, it can really add up quick. This is especially true if you’ve cut down your expenses to save more, or are finding ways to raise some extra cash. Regardless, the best way to let your fund reach its potential is to leave it alone. Seeing your vacation fund as an extension of your budget only increases the likelihood that it be spent elsewhere.
  • Make it stretch — Once your vacation budget is where it needs to be, start looking for ways to stretch it as far as it can go. For example, consider vacationing during the off-peak season when prices are cheaper. Consider traveling with family members and friends in order to spread the costs around. Keep your eye out for deals and be ready to book once the price is right.

Do you have a separate budget for trips? If so, how much do you budget each year?


This article is by staff writer Sam. Sam spent 13 years working in Equities on Wall Street and discusses financial independence strategies on Financial Samurai. Sam is also the founder of the Yakezie Network, the largest personal finance blog network on the web.

Out of the 500 or so college graduates I interviewed over a 13-year period, practically every candidate was extremely enthusiastic about getting their butts kicked working 14-hour days in finance. When you can crack the six-figure mark after your first full year, why not bear torture to get ahead, right? Just don’t tell them they are working below minimum wage if you go by an hourly rate.

I notice the same type of unbridled enthusiasm from many 20-something folks once they get their jobs. They tell me things like, “Sam, I love my job. Things are just so wonderful around here. I can’t be happier.” It’s almost like they are trying to shove their love of employment in our faces to make us feel bad or question why we also don’t love our jobs.

But then something happens to the enthusiasm after they reach the 10-year mark. Enthusiasm for work drops off a cliff. I suddenly start hearing complaints about why work sucks so much. Those who ask me for advice about how to negotiate a severance package tell me about how their micromanaging boss is making them miserable. They tell me that a co-worker is stabbing them in the back or that they got passed over for a raise and a promotion. Bitterness abounds. All people want to do is get the hell out of there and do something more meaningful with their lives.

The problem with many people I’ve consulted with is that they’ve done nothing to prepare themselves to make a move. Their savings accounts are underfunded and their ideas for a new beginning are lacking. As a result, they end up staying miserable at a job they hate for far longer than they should.

BUILD YOUR X-FACTOR NOW

After three months of working in downtown Manhattan, I knew I had very little chance of surviving the brutal work hours and intense pressure for longer than five years. As a result, I saved all I could in order to provide myself a means to escape or survive if I was laid off.

Instead of renting a one-bedroom to split with a high-school buddy, we decided to rent a studio that was walking distance from my work instead. We figured the studio was just a slightly more luxurious version of sharing a college dorm room. Rather than constantly eat out at all the glorious food establishments in the city, I decided to chow down on the free cafeteria food at 85 Broad Street and doggy-bag leftovers for breakfast. I think part of the reason why I gained 15 pounds was because I felt like a bear who had to overeat in order to live off my fat during winter.

All told, I was able to save roughly 40 percent of my $40,000-a-year income after tax back in 1999. As my income thankfully grew over the years, I maintained a 50- to 70-percent-after-tax savings rate because I continued to remind myself that saving money was the only way to escape. My math was simple: Every year I worked and saved 50 percent of my after-tax income equated to one year of living expenses not having to do a single thing. Freedom motivated me to no end, and all was working well until the financial crisis happened.

Between 2008 and 2009, I lost anywhere from 35 percent to 40 percent of my net worth in a matter of months. It felt like the past 10 years of diligent savings was for nothing. I was depressed and angry that I was so stupid to buy stocks and real estate with my freedom money. I still had 25 percent of my net worth in CDs, but that wasn’t enough to protect me from Armageddon.

Losing so much of my net worth spurred me to finally act upon an idea my father had told me back in 2006. He realized that I enjoyed writing because he received all my investment newsletters that I’d write for my clients. So he told me to go start a website and potentially earn a living as a writer. I brushed off his advice because I was too busy. I had just finished up my MBA part time and all I wanted to do was relax a little after three years of Saturday classes for nine hours on top of a normal 60-hour work week. But when the crash happened, I finally hired some guy off Craigslist to help me launch Financial Samurai in July, 2009.

The Light-Bulb Moment

The financial crisis to a rank-and-file-financial-services employee felt like being force-fed Big Macs even though you’re a vegan. With each point of recovery in the markets, I was a little less depressed. I continued to write three articles a week on Financial Samurai as a hobby until one day I realized while relaxing at a bar on the top of Santorini, Greece after a three-hour hike that maybe, just maybe, I had found another way out.

I was drinking an overpriced 6 Euro Mykonos beer when I received an e-mail from an advertising client in London. He asked if I’d be willing to put a banner ad up for $1,200 and I told him, “Of course!” He sent the code over e-mail, I copied and pasted the code onto my site, and within 35 minutes he Paypaled over the funds. “One more Mykonos beer, sir!” I waved toward the waiter as spending $10 for a beer didn’t feel so bad anymore. (Note: Any revenue that came in never went to me as I wanted to avoid any conflict while working. FS was just a hobby that so happened to grow.)

My Santorini moment happened in October, 2011, and six months later I negotiated a severance package and was gone. It’s been two years since flying solo; and I have to say that, despite making much less money, it’s been absolutely worth it.

TIPS ON HOW TO BUILD YOUR X-FACTOR

1) Set aside some time to think. My mother used to always encourage me to meditate for five minutes before going to bed when I was a kid because I was a naughty rascal. I found that when I did meditate, random epiphanies seemed to come to me like, “If you punch a kid in the solar plexus, you will get detention even if he did punch you first.” Life always gets in the way of calm. We have work to do, TV to watch, and families to feed. That said, I highly encourage everyone to set aside 15 minutes a week to think about ideas. You’ll be surprised at what you’ll come up with. Keep an open mind and give everything that creeps into your white room a chance.

2) Spend some money. Part of the reason why I didn’t launch Financial Samurai sooner was because I didn’t know how to launch a website. It wasn’t until the great depression of 2009 that I finally forced myself to pay someone to help me. The first person got around $350 and the site didn’t last for more than 6 months. The second person got $800, and the site lasted for four years until my recent redesign. Don’t let your lack of knowledge prevent you from starting. Spend some money to hire someone with expertise to get you going. Inexpensive resources are everywhere online.

3) Moonlight until you gain momentum. I wrote on Financial Samurai for almost three years before leaving my job. It was after the second year when I started to realize that maybe I could do this full time. But I was still too scared to move because my job was all I had known for 12 years. All I wanted to do was write and connect with people because it was so fun. I encourage everyone to spend several hours a week working on their ideas. Maybe you can start off with one music student a week and go from there. Maybe you can go to cooking class in the evenings or on weekends. You must try in order to know.

THINGS CHANGE ALL THE TIME

After moving out to San Francisco in 2001, I thought I wanted to work in finance until I was 40 (2017). But by age 34, I was gutted because finance people became the bad guys, pay dropped tremendously, and I was working longer hours with more stress. The industry I loved for 12 years stopped being fun anymore. I wanted out, and luckily I figured out how to negotiate my way out to give myself several years of breathing room to try out my X-factor.

Don’t wait until you are unsatisfied with your job to start working on something you truly enjoy doing. Give yourself at least an option to do something else. It might take years of cultivating before you decide to take a leap of faith, but believe me when I tell you that having a choice is priceless when the time comes.

Readers, have you been cultivating an X-factor? What are some things you’d like to do but never bothered trying due to the business of work? After how many years did you start feeling burnt out and wanting to do something new?

Regards,

Sam


This article is by staff writer Lisa Aberle.

Why spend less than you earn?

There are the obvious reasons. Spending more than you earn isn’t sustainable, of course. You can’t build your net worth unless you spend less than you earn. And spending less than you earn decreases your stress level.

But is there another reason to spend less than you earn … something that doesn’t benefit you at all?

Keeping up with the Joneses is a concept frequently mentioned on personal finance blogs. In fact, not keeping up with them is often heralded as one of the first steps toward turning your financial life around. And keeping your life headed in the right direction.

I had never thought about that concept in the opposite way — decreasing my own expenditures so that someone else didn’t feel pressure to keep up with me -- until I was hanging out in my aunt’s cozy, ’80s-era kitchen a couple of years ago. In her mid-50s, she and my uncle seem to be financially comfortable. I assume the mortgage is paid off on their nice house, and they take a lot of frugal vacations. To be honest, she forgot more about frugality than I’ll ever know.

“We could afford to take more vacations, or stay in hotels instead of tent-camping. I could even remodel this kitchen,” my aunt said.

“Well,” I asked, thinking a fresh coat of paint would be an improvement, “why don’t you?”

“Because, I don’t want my family members who are just starting out to feel pressure to overspend.”

What does your kitchen have to do with other people? I wondered.

“If we remodel this kitchen — ” (and the cabinets and wallpaper are in fine shape, by the way) ” — maybe I would cause my son and daughter-in-law to be unhappy with their kitchen. And they aren’t in a position to spend money on a kitchen.

“It’s all about how you start,” she continued. “If you start out with nothing, you can end with something that is still living within your means. But if you overextend yourself financially at the beginning, it makes your whole life more difficult.”

As I finish up writing this article, my family and I are visiting my sister on the west coast. She and her husband rent a small apartment in a large house (three-hole golf course in the back yard!) with beautiful gardens. And we’re staying in the guest house above the four-car garage. It’s an awesome place.

But it’s also large and ostentatious. When you have such a great place, where do you go from there?

And then there is my community. I live in a rural area with small towns scattered along the state highways. Along Main Street in any of these small towns, you’ll usually find a coffee shop with some farmers and retired people catching up on the local gossip.

When you build a house or get a new vehicle or buy some land, people notice. I don’t know if other communities are like this, but in mine, flaunting wealth isn’t done by most people. I mean, there are luxury cars, but for every BMW, there are ten older sedans or beat-up trucks. Maybe people don’t flaunt their wealth because they don’t want to become the topic at tomorrow’s meeting in the coffee shop. Maybe it’s because the community wants to promote simple living. Maybe it’s to prevent others from spending more than they have.

One of my relatives was car-shopping years ago. The car salesman said, “You know, you can afford a Cadillac. Nice cars, those Cadillacs.”

My relative ended up buying a Buick, because he didn’t want to “show off” with a Cadillac. That is admirable, but I was left scratching my head. The price of the two cars? Almost identical.

Part of me thinks this is all kind of ridiculous: If I am living within my means, why should I adapt my spending to prevent someone else from having the urge to overspend? After all, I don’t look at other people and think that I need their car, house, or boat. And should I really care what other people think of the stuff I choose to spend money on?

But all these stories illustrate — at least to me — that we don’t spend our money in a vacuum. To varying degrees, our spending choices affect others. And no other relationship is more important for this lesson than how our spending may affect our children.

Since we’ve had children, we’ve thought about which financial lessons we want to teach them. As we gain more experience with parenting and really consider how what we teach our children now affects their futures, we’ve come up with two concepts that we want them to learn.

Being content with what you have. And just because you have the money for something doesn’t mean you should buy it.

For example, our car is reliable and has been paid off for 4.5 years. It’s not worth much to anyone except us, but now that we have a third child on the way, our friends have been not-so-subtly suggesting that it’s time for a larger vehicle. Even though I am sure a larger vehicle would be more convenient, our car seats five. It will work.

And we could technically afford a larger vehicle. Once we paid off our car, we kept saving $300 a month for several years until we had enough for a replacement vehicle. So, when our kids (and friends) asked when we were going to buy a new vehicle, we didn’t say we couldn’t afford one. Instead, we said we didn’t want to spend our money in that way at this time.

When we decided to discard our previous kitchen remodel ideas and just freshen up what we had for much less cash, I hope that our kids not only realize they don’t have to have amazing houses, but that spending less gives them — and their neighbors? — more options.

So what do you think? Is this idea that we should spend less so that others don’t feel pressured to spend more a little … crazy? Maybe something restricted to my country-bumpkin lifestyle?


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