NEWS– There are thousands of books and articles promising you great fortune if you follow their spelled-out path to financial freedom and success. Though each of these resources have their own motivational twist, they only use a few theories of finance to create wealth. Here are a few additional things to consider in order to potentially earn a big windfall.
Pay Yourself First
One of the most popular theories of self-created wealth is the pay yourself first method, which teaches investors to make the first bill they pay every month a deposit to their savings account. After paying their bills, the premise of this concept is that most people will generally spend the remaining money they’ve amassed. For instance, someone making $2,000 per month will maintain bills at that same amount.
An increase in salary will normally result in a corresponding increase in debt. But under the pay yourself first philosophy, your savings becomes a debt in your mind and is removed from the cycle of increased salary yielding more debt. American Express has a patent on a process for rewarding consistent maximum payments on the pay yourself first schedule. This theory should be the first one that any financial saver implements.
There are only two columns on an accounting ledger. On one side is income and on the other is expenses. To increase your net income, you can take steps to up your revenue, lower your expenses, or a combination of the two. One of the most popular ways of lowering your costs is with bargain shopping and couponing.
In fact, there’s a large sociological history on the impact of couponing in America. People who take the time to cut out coupons feel a certain excitement that makes the process a part of popular culture. According to Better Homes and Garden, couponing can save you money only if you use the coupons on something you will normally buy. Replacement tires, milk and detergent are just a few that fall under that category.
Financial therapy is a holistic approach to wealth creation and management. Compared to the pay yourself first philosophy, financial therapy integrates cognitive, emotional and relational behavior as well as economic factors into one well-developed system of financial growth. Looking specifically at its emotional and relational components, this philosophy addresses the problems with a worldview that doesn’t subscribe to saving.
If someone believes there is scarcity to the resources they normally buy, then it is psychologically impossible to find the money to put into the bank. Financial therapy asks someone to look at their relationship with money and their beliefs about spending and saving. Typically, the wealthiest of us hold a belief that money is easy to make and thus put away for a rainy day. But that’s not always the case for everyone.
A mainstay of economics is the various theories on investments. One of the founding components of all investment theories is risk tolerance. When it comes to investing, an important rule of thumb is that high risk yields high returns. This means your investments need to border the greatest risk that you can support to gain the greatest return.
Efficient frontier is achieved when the two philosophies match. This frontier is dependent on your age, income level and whether you can afford to lose the investment. You may also need to decide if you can use the investment returns for daily living. There are situations where you may not lose the capital, but it may not pay out on a regular basis, which can ultimately hurt your cash flow.