The 4 Keys to Making Money

There are four keys practically use in aiding us in our quest to make money. If you take the time to remember each one, I believe you’ll have a much better prospect of achieving your financial goals than you would by going it alone. These keys are:

1. Revenue Minus Cost = Profit

Never forget that making money consists of one simple formula: Revenue (sales or gross pay) minus cost (expenses) = profit. To make more money, you must either increase your revenue, decrease your expenses, or both. There is no other way. It really is that simple. How you do that involves tradeoffs in terms of time, relationships, and quality of living. Some people try to make money by going to law school and earning a higher salary, even though it means years of study and lots of debt. Others try to make money by starting a successful business.

2. Focus Obsessively on Controlling Your Risk

You should never be willing to take on wipe-out risk just for the chance of making money. Don’t start speculating with options in the hopes of striking it rich. Don’t recklessly borrow money in an attempt to leverage yourself to the hilt and have one big score. Never rely on a single household income to pay all of your bills (I much prefer the Berkshire Hathaway model).

3. Treat Your Money Like an Employee

Think of each dollar as a potential employee that could earn more dollars for you if protected them and put to work. At some point, your dollars (workers) would be earning enough for you to live off the passive income.

4. Making Money Is Impossible If You Delude Yourself

In a 1982 speech to the British Parliament during an international visit, then-President Ronald Reagan said, “If history teaches anything, it teaches self-delusion in the face of unpleasant facts is folly.” While Reagan was discussing political science, the same is true in economics. The first step to making progress is to confront reality, face it boldly, and recognize the situation in which you find yourself. Only then can you develop a plan to improve your life. It may not be pleasant, but it is necessary.

In short, making money and building wealth is easy if you stay the course, keep costs low, and put your cash to work in good investments for long periods of time. Compounding will do all of the heavy lifting.