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1. Principle 1: The risk-return tradeoff - we won't take additional risk unless we expect to be compensated
with additional return. Almost all financial decisions involve some sort of risk-return tradeoff.
2. Principle 2: The time value of money - a peso received today is worth more than a dollar received in
the future.
3. Principle 3: Cash -- Not Profits -- is King. In measuring value we will use cash flows rather than
accounting profits because it is only cash flows that the firm receives and is able to reinvest.
4. Principle 4: Incremental cash flows - it's only what changes that count. In making business decisions,
we will only concern ourselves with what happens as a result of that decision.
5. Principle 5: The curse of competitive markets - why it's hard to find exceptionally profitable projects. In
competitive markets, extremely large profits cannot exist for very long because of competition moving
in to exploit those large profits. As a result, profitable projects can only be found if the market is made
less competitive, either through product differentiation or by achieving a cost advantage.
6. Principle 6: Efficient Capital Markets - The markets are quick and the prices are right.
7. Principle 7: The agency problem - managers won't work for the owners unless it's in their best interest.
The agency problem is a result of the separation between the decision makers and the owners of the
firm. As a result managers may make decisions that are not in line with the goal of maximization of
shareholder wealth.
9. Principle 9: All risk is not equal since some risk can be diversified away and some cannot. The process
of diversification can reduce risk, and as a result, measuring a projects or an asset's risk is very
difficult.
10. Principle 10: Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance.
Ethical behavior is important in financial management, just as it is important in everything we do.
Unfortunately, precisely how we define what is and what is not ethical behavior is sometimes difficult.
Nevertheless, we should not give up the quest.
Earn
Invest Spend
Save
[1]
Earning, Spending, and Saving: The Building Blocks of Personal Finance
The first skill in this framework is your ability to make money. For most folks, this means managing a career
effectively: finding the right job, learning how to ask for a raise, and so on. Others can up their incomes by
selling stuff they already own, pursuing money-making hobbies, or starting their own businesses.
Here are some steps that lead to increased earnings:
Become better educated. In general, the better your education, the better your income.
If possible, choose a career that you love and that pays well. This isnt always possible, of course. But if
you can get paid well to do what you love, it can almost be like you dont have a job at all!
Maximize your salary. This is probably your primary source of income, so make the most of it. Learn how
to negotiate your salary. Make the most of your benefits.
Make money from your hobbies. Find ways to earn a little cash from the things you do in your spare time.
Turn your clutter into cash. When youre trying to get out of debt, you may sell some of your stuffs. You
may not get back what you paid for them, but thats okay. You got out of debt, which was even better.
Though some people dont like to hear it, high income is also associated with hard work. The folks who make
the most money are often those who work the longest hours. Hard work doesnt guarantee a high income,
of course there are plenty of hard workers stuck in low-wage jobs but its tough to master
the art of earning without hard work.
And heres another reason to enhance your earning power: As vital as it is to cut your spending, theres only
so much you can trim from your budget. Your income, on the other hand, is theoretically unlimited.
If life were a game, your earning score would be easy to calculate: Itd simply be a measure of your annual
income. The more you made, the higher your score.
B. Developing Discipline in Spending
While some people find it tough to boost their incomes, others find it tough to keep costs down. There are
even those who believe that thrift is overrated, that its somehow akin to deprivation. But those who dismiss
frugality to focus solely on earning are missing a key piece of the puzzle. Your goal should be to create as
big a gap as possible between earning and spending.
How do you do that?
The surplus (difference between what you earn and what you spend) is important, no question it forms the
foundation of your ability to save but skill at saving comes mainly from what you do with your
surplus.
If you hide your money under a rock, for instance, your skill at saving isnt particularly good. Anyone can do
that. And though you might think youre protecting what youve saved, youre actually losing money to
inflation, the silent killer of wealth. (If you use your extra money to play the lottery, your savings skills are
especially poor!)
What sorts of things go into becoming a successful saver? This is where knowledge of investing pays
dividends. The secret of saving is to learn everything you can about making your wealth grows. Successful
savers:
Understand the importance of creating a plan and sticking to it. (This is where asset allocation and re-
balancing come into play. Ill write about these more later in the month.)
Make logical decisions instead of succumbing to emotion. Successful savers dont make decisions based
on breathless media pundits.
Avoid fads. They dont buy real estate just because everyone else is. They dont buy tech stocks just
because theyre riding high. And theyre wary of gold when its at record highs. They buy low and sell high.
Embrace diversification as a way to improve returns while reducing risk.
Constantly contribute their surplus income to grow their savings. They pay themselves first.
If there were a scorecard for life, your points for saving would be determined by how much you make your
surplus grow, and by how well you protect the money you save.
A quick search reveals tons of investment advice: in the stock market, in retirement accounts, in FOREX or
commodities or gold all designed to help you get a positive return on your time and your money.
But theres one major investment category that typically is not mentioned: Investing time and money in
yourself.
Of course you shouldnt ignore other forms of investing, but taking twenty to thirty minutes each day to invest
in yourself will generate much greater long-term results than any other investment you might make.
How?
1. Build an awesome and genuine personal network.
Actually, you have hundreds of Instagram and Twitter followers, and plenty of Facebook friends, too. Thats
greatbut what about truly personal connections?
Social media connections are occasionally useful, but the best connections are always personal. Who can you
depend on if you need a recommendation (or a new job)? Who can you depend on when you need honest,
objective professional guidance? Who can you depend on when you need a favor? Your Twitter friends are
unlikely to be there for you but people with whom youve made a genuine connection just might.
How to invest: Spend a few minutes every day reaching out by email or phone, not through social media, to
peers or customers or colleagues or fellow alumni or anyone you want to compliment or praise. Spend a few
minutes giving you may never receive in return, and thats okay, because feeling good about helping
someone else is, in itself, worth the effort.
2. Actively expand your horizons.
The only way to think outside the box is to occasionally live outside of your typical box. The only way to live
your life differently than other people is to actually live differently, at least some of the time. Doing a few
things you normally would never do is the perfect way to find new opportunities, grow your network, and
discover opportunities you never knew existed.
How to invest: Get a part-time job, one outside your field. Take a class in an area outside your expertise.
Pick something outside your comfort zone and do it in the process youll learn and grow and gain
confidence... and realize that your potential is much greater than you ever imagined.
3. Start a side business.
Focus is important, but so is flexibility and openness. Maybe you have programming skills you arent using.
Maybe youd like to sell a few products online. Maybe youd like to teach or tutor or mentor. All you have to
do is take something youre interested in and turn it into a small business. While you may make some money,
more importantly youll leverage your interests, broaden your business perspective, possibly bring some of
what you learn back to your career and get hands-on experience with being an entrepreneur.