The Basic Formula of Wealth

The Basic Formula of Wealth

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One of my favorite subjects is the subject of wealth. 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. If I want to increase my wealth, all I have to do is increase my assets and reduce my liabilities
  2. If my income is greater than expenses, then I could use the extra 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
  3. 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?

How to Calculate Wealth

If you use a tool like Personal Capital, it is very easy 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. Reduce Your Expenses
  4. Set Up a $1,000 Mini Emergency Fund
  5. Pay Down Your Debt
  6. Increase Your Income and Begin Investing
  7. Set Up an Emergency Fund
  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 time to read: 2 min