Monthly Archives: February 2012

The Most Basic Financial Rule

Most people think the most basic personal financial tool is a budget. Living by the rule of a budget has, at its core, the principle of containment of expenses to available income. This is certainly a sound financial tool. The issue I have is that when used as the primary tool in governing finances, it implies that the income is a fixed or nearly fixed figure and all expenses must be made to fit that income figure. This idea establishes a ceiling that we have to work under and that if you extend expenses beyond that income ceiling its a bad thing. Typically, if we cannot bring expenses below that ceiling then we try to get them as low as possible. Then and only then do we try to figure out how to raise the income ceiling just enough to meet expenses. With most people this is a huge challenge because they have only developed income that is tied to the number of hours they have available to work. this means they must increase their number of working hours or increase the rate of income per hour. EITHER OF WHICH IS ONLY INCREMENTAL! There are only so many hours in a day and there’s only so many dollars an employer is willing to pay. Thus establishing the “income ceiling” which governs a budget.

If that works for you then good for you. To me, my dreams and goals don’t fit that paradigm. I spent 25 working years figuring out that its just too slow of a process. I either needed to shrink my plans or find a new plan. What I discovered was the concept of “Multiple Streams of Income”. By opening my mind up to the possiblitiy of multiple streams of income I soon found out that it didn’t mean working multiple jobs. It meant finding sources of income that did not depend on my limited hours or limited talent or skills. It meant finding sources of income that were generated in spite of my limited hours, talent or skills. To me this is the true “Most Basic Financial Rule”. The one of learning to create passive forms of income. 

Where a budget creates a ceiling to work under, creating passive income implies that there is potentially no ceiling. The only ceiling is the one you establish yourself limited only by how much income you wish to create.

To create unlimited sources of passive income requires time and energy. But…. it mainly only requires it for a short time to establish the source and then a small amount of time and energy to maintain the income. Each new source of income increases the “income” column of your budget and raises the budget “income ceiling”. Then you move on to create the next income source which once again increases your income ceiling.

You will find yourself multiplying your time and abilities rather than adding to them incrementally by working more hours or getting  65 cent per hour pay raises.

Developing passive sources of income should be your main financial tool. Monitoring them through your budget is a good secondary tool.