The Basic Formula of Wealth
January 30, 2008 by Pinyo.
One of my favorite subjects that I talk a lot about on this blog, is the subject of wealth. As you know, I share my net worth monthly. Although there are many beliefs and philosophies on how wealth could be accumulated, the mathematical nature of wealth is all the same: Wealth (Net Worth) = Assets - Liabilities.
Here’s a little graphic to help us visualize this concept:
So what are some basic facts that we could derive from this?
- If I want to increase my net worth, all I have to do is increase my assets and reduce my liabilities
- If my income is greater than expenses, then I could use the surplus to:
- pay down my debts, thus reducing my liabilities
- save and invest, thus increasing my assets
- the net effect is increased wealth, or net worth
- If my income is less than expenses, then the deficit:
- could force me to liquidate my assets to cover the excess expenses, thus reducing my assets
- could force me to accumulate more debt, thus increasing my liabilities
- the net effect is decreased wealth, or net worth
Therefore, all I need to do to increase my wealth is earn more and spend less. Simple, eh?
Now for a little fun…
I hope you can help me build a list: A-Z of wealth building. Basically, any idea to increase income, reduce expenses, save money, pay of debt, etc. I will kick it off…
- A - Ask for a raise. If you know you deserve it, don’t be shy. Ask for it.
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- Feb 3, 2008: pfblogsround 3rd February 2008 | plonkee money
- Feb 19, 2008: ABC of Wealth Building | Moolanomy
Budget - Track your expenses and manage them. Set aside money for savings, for investing, for paying off debt. Plan for it and allocate it so you don’t spend it! Manage your money, don’t let your money manage you.
B - Bargain with credit card companies and lenders for better rates.
Boo, GLBL’s “B” was way better than mine.
C is for Credit cards. Pay them off!!!
Mike
D is for Debt. USE DEBT WISELY. Do not take it on unless you know what you are doing. Yes, wealthy people leverage debt, but MOST people who play with debt drown in it.
I will return for S. I CLAIM S!
Whenever you purchase any item always as the question “Is that your best price”. My experience shows that doing so three times during a transaction will almost always result in some kind of discount. Be cheeky rather than aggressive when you do it and the shop assistant will almost always give in.
E is for Education. Financial education will go a long way to improving your wealth. It could be learning the basics about money management, how the markets work, the time value of money…
F is for frugal! Live frugally!
G is for Goal(s). It is very important to set monthly/quarter/yearly goals for things such as reducing expenses, reducing liabilities, accumulating assets etc.
H is for House. You need to own the house you are living in at some point of time. Being able to own extra houses (assets) is even better.
I is for Investments. Without investments in different asset classes, you cannot really grow your net worth.
J is for Just Start - Too often I spend so much time planning, that I don’t put my plan into action.
K is for KILL your DEBT because it’s ahard to accumulate anything when you have to send out so many payments!
B is for barter - non-cash exchanges circumvent the drain of cash.
L is for Live. Live, Laugh, Love - and know what is IMPORTANT to do that and what is just…. stuff. I spent a whole lot on my kids and they are worth that and more. I spent a whole lot on bath and body works lotion over the years and um… well…
anyway.
M is for Motivation
H is for housing. Plan how much house you need and can afford, how best to finance and to repay.
Q is for quit acquiring new debt. You can’t get out of the hole if you keep digging.
I is for Invest! Put money into stocks, bonds, and savings accounts for the future and watch it compound.
I is also for Interest! Let your money work for you by earning interest. Johnny Carson while hosting the Tonight Show once said, “Scientists have developed a powerful new weapon that destroys people but leaves buildings standing - it’s called the 17% interest rate.” Don’t pay interest; put it to work FOR YOU!
O is for Opportunities. Seek them out and when they come to you, take advantage of them.
N - Never give up
P - Pay yourself first
R - Remember your goals
N is for Not Now. Save up for the things that you want and you will value them more.
S is for…
..that would be too mean.
plonkee! meanie lol
S if for SNOWFLAKE!!!! Pay a little, save a little, here a little, there a little… earn a little more, save a little more…
F is for Financial Freedom!!!
Q - Question your financial assumptions (is homeownership better than renting? is it better to pay off cards and delay retirement investing? etc.)
T…T is for Time Value of Money. Start saving now to take advantage!
I jumped to the end.
X - eXamine your exposure to risk, do you have enough insurance? You don’t want one catastrophe to wipe you out.
Y - You can achieve wealth if you set your mind to it and work diligently to achieve your goals.
Z - Zero out your bad debt, it’s hard to build a house if you start with a hole in the ground.
but if I start with a hole I can have a basement
There are already 26 so I guess there can be no more. Maybe if we us letter combos—
Ch — Change your habits or Save your spare change.
Sh — Shrink your debt
Kn — Know your limits.
cd :O)
Thank you everyone for participating. I think we got all the letters. I will compile the list and publish it later next week.
Don’t hesitate to add more if you can think of any other good ones.
P is for Pinyo’s Goal, every formula needs an ‘answer’ i.e. how much are you striving for?
I guess we could have made this G = Goal
C-Do not be COMPLACENT.Take action and expects a reward. No action will leave you worse off.
S- Save today and enjoy its reward tomorrow.