| Given the perennial popularity of 'How to get rich' | | | | to be an accountant, which is but what Mr. |
| books, one could assume that those books | | | | Micawber lectured David Copperfield about. |
| contain arcane, hermetic, or even miraculous | | | | How does one solve the "bottom line" problem? |
| formulas for people to get rich; that all one has to | | | | Only two things can take place: either you |
| do is find that elusive message. | | | | increase your income, or you decrease your |
| But, hard as you might try to dig up that nugget | | | | expenses--simple as that. |
| of knowledge, you won't find it. Why not? The | | | | Many people live a life of "quiet desperation" --as |
| answer is simple: there's no such a thing as a | | | | Thoreau, said-- living from paycheck to paycheck, |
| magic formula. | | | | or from hand to mouth, or even worse: living with |
| Over my long journey in business and academia, | | | | the ever present angst of where their next meal |
| I've found that the closest resemblance to that | | | | will come from. |
| magic formula for riches is the awareness and | | | | If a touchy reader says to me, "You're telling me |
| good practice of two concepts: (1) Solvency, and | | | | what I already know!" I will reply: "So, what is |
| (2) Profitability (3) A little knowledge of what | | | | your choice? Increase your income or cut back |
| Adam Smith taught, and (4) Hard work. | | | | on your expenses?" The choice is ours, it doesn't |
| Many people think that solvency is a business | | | | lie with outsiders--you must choose. |
| concept, and that only applies to business | | | | In my experience I've always found it easier to |
| situations, such as maintaining a good credit rating, | | | | look for additional income rather than to cut back |
| or paying debts on time. In my view, solvency is | | | | on expenses. Others may think differently, but I |
| a virtue --not only in business affairs but also in | | | | believe that opting to reduce one's standard of |
| private affairs-- which people must develop and | | | | living is not only backwards, but it diminishes |
| maintain throughout their entire lives if they wish | | | | expectations, causing people to feel pessimistic |
| to become wealthy. Solvency leads to capital | | | | about the future. |
| formation, and capital formation to the growth of | | | | In his landmark book The Wealth of Nations, but |
| wealth. | | | | in particular in the section "Division of Labor," |
| What is Solvency | | | | Adam Smith discusses three points: |
| When I was young, one of my favorite books | | | | (1) Humans show a propensity "to truck, barter, |
| was Charles Dickens' David Copperfield. Without | | | | and exchange one thing for another." Though |
| major mental effort I can recall and delight in the | | | | smith isn't explicit, he hints that this propensity |
| woes, decencies, and indecencies, of the many | | | | may well be inherent in humans. |
| characters that populate the novel. Yet, nothing | | | | (2) Humans don't differ greatly in natural talents; |
| stands out as Mr. Micawber, the garrulous, | | | | the difference is caused by habit, custom, and |
| well-intended, yet unfortunate man who led his | | | | education. |
| family into abject poverty. | | | | (3) By the division of labor (specialization), humans |
| Good intentions and awareness are insufficient to | | | | produce a surplus of product that they can sell to |
| handle one's affairs in a productive way. Good | | | | others. |
| practice is indispensable. Mr. Micawber's advice was | | | | None of the above discussion would have any |
| wise but he never practiced it himself: | | | | practical value if one doesn't reduce the discussion |
| 'My other piece of advice, Copperfield," said Mr. | | | | to a very simple conclusion: |
| Micawber, 'you know. Annual income twenty | | | | To satisfy not only your needs, but also to have |
| pounds, annual expenditure nineteen, nineteen six, | | | | something leftover, you either sell your labor or |
| result happiness. | | | | you sell a product, or both. |
| When your income, your 'take home pay,' or your | | | | So, if you sell your labor, then your labor must be |
| revenues are greater than your expenses, then | | | | worthy, it must be sought, it must be valuable to |
| the welcome result is happiness. Why happiness? | | | | employers. Training and education give workers |
| Simply because not only you are living within your | | | | the skills necessary for the labor market; the |
| means, but you are also saving something--saving | | | | higher the skills the higher the compensation. While |
| for capital formation. | | | | a bookkeeper will earn $20 an hour, the same |
| Now, let's look at the reverse, as seen by Mr. | | | | bookkeeper with training and a course work as a |
| Micawber: | | | | C.P.A., (certified public accountant) will command |
| 'Annual income twenty pounds, annual expenditure | | | | $200 and hour-or more. The handyman in my |
| twenty pounds ought and six, result misery. The | | | | building who used to earn a pittance is now |
| blossom is blighted, the leaf is withered, the God | | | | earning high fees as a certified electrician. |
| of day goes down upon the dreary scene, | | | | However, neither spiritual success nor material |
| and-and in short you are for ever floored. As I | | | | riches will accrue unless we work hard. A terrific |
| am!" | | | | nugget that I've always carried with me comes |
| Ah! How true that is. When expenses are greater | | | | from Proverbs X: |
| than income, then the unwelcome result is | | | | He becometh poor that dealeth with a slack hand: |
| disaster, and human disaster is but undisguised | | | | But the hand of the diligent maketh rich. |
| misery and wretchedness. Living beyond one's | | | | Not to brag but to share my experiences, I can |
| means causes one to be "for ever floored." And | | | | say that I owe my good fortune to Adam |
| since England had no bankruptcy protection laws in | | | | Smith's insights: I learned valuable marketable skills, |
| those years, Mr. Micawber was remanded to | | | | and I also learned to sell products in the internet. |
| King's Bench Prison. | | | | Yet nothing will be accomplished if one isn't |
| One way to get trapped in a ditch --from which is | | | | judicious, for as Adam Smith said in his Wealth, |
| difficult to get out-- is by living beyond one's | | | | "Capitals are increased by parsimony, and |
| means: the result is that you are forever stuck in | | | | diminished by prodigality" (CH III.,PT II). |
| that trench. In our contemporary economic times, | | | | Of course, 90 per cent of the workers live by |
| that ditch is called "Credit Card Buying." When | | | | their skills, collecting paychecks for salaries or |
| people realize that they owe more than they | | | | wages. About five per cent will develop |
| have in new worth, then they realize that they | | | | entrepreneurial spirit and learn to create and sell |
| are insolvent, which is one step away from filing | | | | products; the rest, four to five percent fill the |
| for bankruptcy protection. | | | | ranks of the unemployed. |
| What is Profitability? | | | | Nothing prevents an individual from selling their |
| What makes people wealthy is the awareness of | | | | skills and also selling products. One must choose. |
| profitability. In Accounting terms, when the | | | | By having skills and selling products, I generate net |
| revenues are greater than the expenses, the | | | | income from which I pay all my monthly bills, with |
| "bottom line" or net income is positive. The | | | | the surplus or leftover augmenting my net worth |
| opposite will be deficit or loss. | | | | every month. |
| To absorb this simple concept one doesn't have | | | | |