The Finance Equation

If you think you have your finances in order, think again. I am the best money handler I know and "Personal Finance for Dummies" still taught me a few things! It is an excellent book on personal finance, planning, insurance and investment planning.

Using this book I put together an equation which summarizes the inflow and outflow of money. It's not difficult to understand and for me helped me visualize how to best spend my money.

Net=Income
     - (Tax Deferred Investments+Health Insurance+Life Insurance)
     + (Tax Free Dividends, Interest & Capital Gains)
     - (Federal Taxes+State Taxes) this includes FICA, etc.
     - (Food+Energy+Commodities+Rent/Mortgage)
     - (Necessary Services)
     - (Car Note)
     - (Unnecessary Services)
     - (Taxable Investments)
     + (Dividends+Interest+Capital Gains)
     - (Dividend, Interest & Capital Gain Taxes)

A lot of outs and not very many ins. But, let's break down what we can learn from this.

  1. The only additional income you're going to get is through your investments.
  2. The best investments are tax free.
  3. The second best investments have tax free returns.
  4. Spend more money to buy quality items that last longer.
  5. Live in a state with no income tax.
  6. Find ways to lower your food, energy and living costs. Also look for ways to reduce necessary services
  7. Don't buy cars on credit.
  8. We all need entertainment, rest and relaxation, but keep it in check.
  9. And again just because it's so important: the only additional income you're going to get is through your investments.