J.D.’s equation is correct, but it’s only part of the story. cash flow is in fact income minus expenses like the article states. However, cash flow does not correlate directly to wealth. You would naively think that wealth is the integral of cash flow with respect to time. It isn’t.
Suppose you earn $50,000. You immediately spend this money on building supplies and build a house with it. Your net cash flow is $0, but you now have a house that’s worth more than what you paid for it. You’ve got a property with a value of, say, $60,000. This is investment. Certainly you needed some cash flow to start the investing process, but cash flow itself is not wealth. Also, you now have the ability to generate $60,000 new dollars in positive cash flow by selling the house you built, in which case you can invest in something new.
The average American household income is about $3,000/month, after taxes. If you spend *all* of that on living expenses, you will never save your $50,000 to build your house. If you manage to cut your living expenses by half, you can now save your $50k in about three years. However, if instead you were able to double your income, you could save your $50k in half that time. If you take this even further and double your income again (to $12k/month) you could save you $50k in only 6 months. However, if instead you cut your living expenses by half a second time (to $750/month) it would still take you 22 months to save $50k.
You quickly hit a point of diminishing returns with cutting expenses, where each additional percent cut from your budget buys you less and less. The opposite is true for increasing your income. There is absolutely no way to save $50k in less than 16 months on $3,000/month. However, if you’re making enough money, there’s no limit to how fast you can do it.
Here’s one more example that’s not so extreme:
Set a goal to save $250,000. Pretend you want to buy a house in cash.
Start off with the same $3,000/month salary.
Start with the same $3,000/month living expenses.
Scenario 1: Your living expenses never change, but each year, you manage to increase your income 7% over the previous year. This seems feasible, it’s not a “get rich quick” scheme, you can probably find some way to improve your performance in whatever business you’re in by about this much.
You save your $250,000 in a bit over 12 years. At the end of the 12 years, you make about $120k/year. This is definitely a good salary, but it’s not ridiculously, infeasibly high.
Scenario 2:
You keep the same salary every year, but cut your expenses by 7%.
You save your $250k in 17 years, which is significantly longer. You’re also living on $920/month at the end of this, which is probably infeasible in real life. You just can’t keep cutting and cutting and cutting to this degree.
Scenario 3:
You combine both 1 and 2, both increasing your income by 7% every year, and cutting expenses the same amount. You’d think this would make a huge difference, right?
You’ll save your $250k in 10 years. This is definitely an improvement over either one of the other scenarios, but it’s not nearly the same sort of improvement you see if you solely increase income instead of solely decreasing spending. It also requires you to live on $1500/month at the end, which is certainly a lot more feasible that $920, but you still may think that’s a bit low.
This whole calculation ignores inflation (meaning, your 7% raise per year is probably more like 10% in absolute terms). It also means that at the end, when I say you’re living on $920/month, that’s $920 dollars at 2010 value, not 2027 value.
This is essentially the same concept that J.D. likes to call ‘the power of compound interest’, except applied in a slightly different way.
One other note on this example: selling your ’stuff’ makes almost no difference here. Even assuming you had $10k worth of stuff to get rid of at the beginning of this, it only buys you a few extra months in any of these scenarios. This is because a single, one-time influx of $10k is small in a scenario that takes 10-17 years to play out. At the end of these scenarios, you’re saving in the ballpark of $2000-$5000 every month. The extra $10k just isn’t that big of a deal any more. Selling ’stuff’ can help you reduce debts and stop paying interest to other parties if you can do it all at once, but it really doesn’t help you build long-term savings very well.
I know the site is called “get rich slowly”, but I like to think that is meant to convey an idea of perseverance and the fact that “get rick quick” schemes don’t work. It’s not meant to imply you should go artificially slower than you have to, just because.
In short: ask for a raise every year, even if you don’t always get it. Don’t be afraid to take a job at a competing company if they’ll offer you a better salary (assuming the job is otherwise similar). You don’t need to start your own company to make a few more percent every year. Just be valuable in your industry, show that to your employers, and don’t be afraid to ask for raises.
The Real Damage Calculates the True Cost of a New Purchase on Your Credit Card
Webapp The Real Damage calculates the true price of adding another purchase to a credit card that's already carrying a balance.
The best way to avoid throwing away money on credit card interest is simply to not carry a balance. (A good portion of Lifehacker readers pay off their cards every month.) But if you're in the process of digging out from credit card debt, it can still be tempting to put the occasional purchase on the card, particularly if it's not that expensive. The catch, of course, is that if you take the added interest that accrues on the increased balance of your debt into account, over time that price quickly grows—and that's the dollar amount The Real Damage focuses on.
Plug in the price tag of an item you're interested in, along with the APR, balance, and your current monthly payment on your credit card, and it'll figure out the true damage. Once you've got a more accurate picture of the price, then you can decide if it's worth it.
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