In order to survive and thrive, you need to earn a profit.
You already know 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 couldn't exist without it. Food and water give us strength to do the stuff that matters most. So too, profit isn't necessarily the purpose of business — but a company can't survive without it.
Here's a secret: People need profit too.
In personal finance, “profit” is typically called “savings”. That's too bad. When people hear about savings, their eyes glaze over and their brains turn to mush. Bor-ing! But if you talk about profit instead, people get jazzed: “Of course, I want to earn a profit! Who wouldn't?”
Profit is easy to calculate. It's net income, the difference between what you earn and what you spend. You can compute your profit with this simple formula:
PROFIT = INCOME – EXPENSES
If you earned $4000 last month and spent $3000, you had a profit of $1000. If you earned $4000 and spent $4500, you had a loss of $500.
There are only two ways a business can boost profits, and there are only two ways you can boost personal profitability:
- Spend less. A business can increase profits 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.
- Earn more. To generate increased revenue, a business might develop new products or find new ways to market its services. At home, you could make more by working overtime, taking a second job, or selling your motorcycle.
When you earn a profit, you don't have to worry about how you'll pay your bills. Profit lets you chip away at the chains of debt. Profit removes the wall of worry and grants you control of your life. Profit frees you to do work that you want instead of being trapped by a job you hate. When you make a profit, you truly become the boss of your own life.
With even a small surplus, the balance of power shifts in your favor.