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The Basic Formula of Wealth

The Basic Formula of Wealth

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One of my favorite subjects is wealth building. At the most basic level wealth, at least your financial wealth, is your net worth. 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.

How Net Worth Works

Here’s a little graphic to help us visualize this concept:

Net Worth Assets Liabilities

So what are some basic facts that we could derive from this?

  1. Net Worth: If you want to increase your wealth, all you have to do is increase your assets and reduce your liabilities
  2. Assets: If your income is higher than expenses, then your assets go up. You could use the extra money to:
    • pay down your debts, thus reducing your liabilities
    • save and invest, thus increasing your assets
    • the net effect is increased wealth or net worth
  3. Liabilities: If your income is less than expenses, then there is a deficit. This could result in:
    • you’re forced to liquidate your assets to cover the extra expenses, thus reducing your assets
    • you’re forced to accumulate more debt, thus increasing your liabilities
    • the net effect is decreased wealth or net worth

Therefore, all you need to do to increase your wealth is to earn more and spend less. Simple, eh?

How to Calculate Wealth

If you use a tool like Personal Capital, it is straightforward to see your net worth. Personal Capital works by linking your investment accounts, bank accounts, credit cards, and loans and aggregating all the data into one place. You can also list any other assets and liabilities that cannot be linked. Once this is all set up, the software will show you what your net worth is currently.

You can also calculate your net worth manually, follow this guide, How to Calculate Your Net Worth to do the calculation.

12 Steps to Build Wealth

The general concept is easy, but the process of building wealth is a little more involved. Over the years, I have worked to refine the process of building wealth and distilled it to these 12 steps as follow:

  1. Make a Commitment to Improve Your Finances
  2. Start Tracking Your Income and Expenses
  3. Boost Your Finances with Quick Wins
  4. Set Up a $1,000 Mini Emergency Fund
  5. Pay Down Your Debt
  6. Increase Your Income and Begin Investing
  7. Complete Your Emergency Fund and Personal Financial Plan
  8. Invest Your Money
  9. Buy a House
  10. Manage Your Risks
  11. Plan for the Future
  12. Pay It Forward

Bottom Line

Wealth = Net Worth = Assets – Liabilities.

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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.

The Basic Formula of Wealth

by Pinyo Bhulipongsanon time to read: 2 min
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