In the past decade, much had been said about wealth and being wealthy, but very few people had been able to acquire wealth and live a life of financial freedom. We know that with the current projection as of 2020, about 1,700 millionaires are made every minute in the United States.
One might be wondering if there’s a wealth formula for building wealth, and why are so many Americans still struggling financially? We will be looking at the understanding of how money works and the wealth formula.
The Wealth Formula.
Money doesn’t grow on trees. You must work for it. If you want to build wealth, there is a formula for you to build on; Money, + Time, +/- Rate of Return, – Inflation,– Tax = Wealth. It doesn’t take a genius to get rich. Nor are exceptional talents required. You don’t need to be lucky. And you certainly don’t need to be privileged. You do, however, have to make getting rich a priority in your life—and be willing to focus the majority of your time and energy on doing what it takes to build real wealth. Let’s breakdown the variables on the wealth formula above;
1. Money – Money is a medium of exchange in the form of coins and banknotes, and if you have a job, your employer pays you with it but, the difference between being wealthy or being financially free will depend on what you do with your money after you are paid.
2. + Time – Money grows over time. That’s why time is one of the most significant variables in the wealth formula. A return on investment for over ten years is going to be more than the return of the same investment if it is kept for just five years. Procrastination is the enemy of saving. When many people are young, they think they have a lot of time to save.
Then they get married, have kids, and buy a house. With a mortgage and new expenses, money becomes tight. They tell themselves they will start saving later. What if they had just put aside $100 or $200 a month when they were young? They could have accumulated significant assets today.
3. +/- Rate Of Return – The rate of return is the return on investment over a period, and it could be profit or loss. It is a percentage of the amount. If the return of investment is positive that means there is again over investment, and if the return is negative that means there is a loss over investment.
4. – Inflation – It is a quantitative measure of the rate at which the average price of goods and services in an economy increases over some period. For example, the price of a car in 1990 is less than the price of a vehicle in 2020. We can see that the purchasing power of our dollar or money decreases over a period when we look at things that we could buy with the same amount of money over time.
5. – Tax – It is an amount of money paid to the government that is based on your income or the cost of goods or services you have bought. Taxes take a big chunk of your money. Any saving and investment strategy must consider the tax impact on it. What is your current tax rate? What will the tax rate be in the future? Will taxes rise or fall?
Each time you are thinking about your worth and building wealth, you must not forget the wealth formula because most millionaires and successful people use this formula in different investment vehicles to build their wealth over time.
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Are You A Saver Or A Spender?
Where is the money? A good number of people always seem to have money problems. Most of the time, they are short of funds. Warren Buffet advises, “Do not save what is left over after spending, spend what is left after saving”.
As I see it, the wealth-seeking world is divided into two camps. In one, you have the wealth accumulators: men and women who are cautious about spending but eager to save and invest.
The other camp is populated with spenders: men and women who are obsessed with things. They spend all their spare money, and often much more than that, buying things that say “rich” but impoverish them. To become wealthy, first, you need to build a small nest egg by spending less than you earn. Simple, huh? But not if you don’t have the self-discipline to do it.
Meanwhile, keep in mind that even though the material things you hunger for are indisputable of value, unless you have the financial capacity to keep them, to maintain them, and to replace them, you do not have wealth. You simply have its obligations.
Pay Yourself First.
It is advisable to set aside 5 to 10% of your income to save for the future. If possible, save 15% or more. Treat it like a bill that you must pay, and pay it first. That’s your family’s financial bill. Doesn’t it make sense to pay your family first before paying other people’s bills? Your cable TV bill is not more important than your family’s financial well-being.
Buy Only What You Need.
Spending money is a way of life for many people. Shopping becomes a habit. Finding bargains and buying on-sale items don’t always mean that you’re saving. It could be that you’re buying things you don’t necessarily need. Know the difference between what you need and what you want. When a person says they need new shoes, is it truly essential or simply a desire? How many people intend to buy a Toyata but drive home with a Lexus?
Small Changes, Big Money.
Turns out, millennials are not spending all their money only on food and eating out. However, they are a lot more spendy than all other living generations. According to a new analysis from GOBankingRates, millennials spend $208.77each day, on average about $44 more than the average American, who spends about $164.55.
That being said, what if you could make small changes to your spending habits and start saving $10 a day? That’s $300 per month. What if you are able to find an investment vehicle with 8% Rate of return in 30 years, you will have approximately $447,107.
Get Rich Slowly.
Do you want more freedom in your life? Do you want more choice about where you live, how you live, how much you work, and so on? Do you want more leisure in your life? Do you want to end the lifestyle of living from paycheck to paycheck? You don’t want to feel compelled to work 8 or 10 hours every day, or five and six days every week. You want more tranquility in your life.
You would like an end to the stress that the lack of money sometimes causes. You want to be able to sleep easily at night and enjoy your days without worry. These goals are wrapped up very tightly in your desire for financial freedom, and your understanding of how money works and being able to use the wealth formula.
Avoid get-rich-quick impulses. Hot stocks and rising real estate markets can sound appealing, but one wrong pick can set you back big time from your savings goal. Investing is not gambling. You must understand how money works, have a plan, and stay disciplined with your action plan until you reach your goal of financial freedom.
“If you have any feedback about the wealth formula – how money works that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”
NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.
* Saving Your Future ( www.worldsystembuilder.com).