Corporations and individuals have something in common: Both groups have to take a hard look at revenue and spending. One big factor relating to both revenue and costs is sustainability. If a company isn’t clear about sustainable, repeatable sources of revenue, they can’t survive over the long term. That same rule applies to an individual working on a personal budget.
Twitter’s recent performance
In late July, Twitter reported financial results for the second quarter. Sales and earnings both increased at the rate expected- but the stock price declined after the financials were announced.
Stock analysis are concerned that Twitter does not have an effective strategy to grow their audience. They need more people to use the service- and to stay engaged long enough to click on ads or links.
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Twitter needs a strategy to generate sustainable user growth, which will help them increase sales and earnings over the long-term.
Applying the concept to personal finances
The concept of sustainability can be applied to your personal finances. Here are some examples:
• Investment rates of return: What is a sustainable rate of return on a stock portfolio? Well, let’s use the Standard and Poor’s (S&P) 500 index as an example. This is an index of the 500 largest stocks, in terms of capitalization. The average annual rate of return from 1928 to 2014 is about 10%. If you’re investing over the long-term, 10% is probably a sustainable (expected) rate of return.
• Discretionary spending habits: A great way to budget for discretionary spending is to ask yourself this question: How long can I keep spending at this rate and stay within a budget? If you’re running up credit card debt or otherwise borrowing money to maintain a spending level, that’s not sustainable. If you can’t sustain $500 in monthly entertainment spending, for example, cut back to $200.
• Fixed spending choices: “Fixed”, in this case, means a spending choice that you can’t change month-to-month. When you commit to certain types of spending, make sure that the cost is something you can afford. Say that you commit to spend $5,000 a year on a timeshare vacation plan. Is that sustainable? Can you afford that $5,000 on your current level of income? If you have to borrow money to keep the timeshare, that shouldn’t continue.
When you think about your personal finances, remember the concept of sustainability. That term will help you make smarter decisions and gain some peace of mind.
Do you use these financial strategies? I’d love to hear from you.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
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Image: Andreas Eldh, The Twitter Bird, (CC By 2.0)