Four Equations of Money & Four Financial Needs
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Four Equations of Money & Four Financial Needs

by Admin 4. October 2015 22:03

 There are two kinds of income – Active income and Passive income.

Active income is the income you get by spending your time & skill, like your salary, consultancy or business income.

Passive income is the income that you get without spending your time like rental income, interest and dividends.

To become financially free your passive income should be greater than your active income.

There are four equations of money: 

  1. Income + Loan = Expense
  2. Income = Expense
  3. Income – Expense = Saving
  4. Income – Saving = Expense 

The fourth equation leads you to #financial freedom if you live your life by it, as your regular savings will increase your passive #income. Ask yourself in what equation you are currently in and what is your plan to achieve financial freedom. 

The four financial needs are: 

  1. Safety
  2. Security
  3. Liquidity
  4. Growth 

Safety comes from having your own house. Please remember your first house is your security and your second house is your investment.

Security comes from adequate insurance so that your family would be taken care of in case you are not there. 

Liquidity is enough cash saving for at least six months in case you lose your job, business, or consultancy. 

Growth is the need to make your money grow much faster than inflation, as inflation eats away a part of it regularly. If your money is growing at 10% and inflation is at 8%, the effective growth of your money is 2% only. The effective rate of growth should be around 20% for which equity and real estate are good places to #invest in.

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