The Basic Formula of Wealth
, on January 30, 2008
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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About the AuthorPinyo
is the owner of Moolanomy Personal Finance
and an entrepreneur with over 20 years of business experience. He has a strong appreciation for business management, investing, and wealth building. He has written for many online publications, including American Express and U.S. News.
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