Tuesday, April 04, 2006

Increasing Your Income

Most accountants, financial planners and wealth-building experts agree that there are really only three ways to increase your income. You can either:

1. Increase your revenue (make more money)

or

2. Decrease your expenses (spend less money)

or

3. Do both 1 and 2

However, what is not so obvious are the words that should always follow these “income-increasing” statements. Accountants, financial planners and wealth-building experts are often so close to these principles that they assume we all know them to be true. They also tend to believe that everyone has the necessary discipline and patience to automatically make them happen. Here are the reality-based revised versions of the statements that, although might not be as easy to relate to, really make more sense and, if you follow them to the letter, will help keep you on track. If you want to increase your income you must either:

1. Increase your revenue (and at the same time keep your expenses the same or less than before)

or

2. Decrease your expenses (and at the same time maintain or increase your revenue)

or

3. Do both 1 and 2

One version of Parkinson’s Law is that “expenses rise to meet income.” Put another way: “The more you make, the more you spend.” If you truly want to increase your income, it is important to maintain the same, or even a scaled-down, style of living for a period of time.

For example, if you make $45,000.00 per year and receive an annual raise of 10%, you gain an additional $4500.00 per year ($375.00 per month) for a new total of $49,500.00. It is awfully tempting to spend this extra $4500.00, rather than invest or save it. In addition, it is easy to talk yourself into “upgrading” your lifestyle by trading up for a more expensive car, taking an unplanned vacation, or some other “deserved” reward. After all, you just “increased” your income by $375.00 per month. Right? Wrong – if you spend it!

If you spend the extra money, you have not really increased your income at all. In fact, if you spend it and then take added taxes and other liabilities into account, you may actually have less income than you had before the raise! Weird, huh?

The point here is that it’s not just about making more money. It’s about what you do with the extra money that determines whether or not you have truly increased your income. The reverse is also true. Let’s say that instead of the 10% raise, you get no raise at all. But, you decide to “raise” your income by cutting expenses. If you find a way to cut your expenses by 10%, you actually are gaining over $375.00 per month. If you are able to cut your expenses by $4500.00 per year, in reality, you just increased your annual income by 10%. Weird again, but true.

Your desire, ability and willingness to both cut expenses and increase revenue will determine how fast and how much your income will jump. It’s a powerful combination, and this is the “secret” that most wealthy people use all the time.

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