Wealth can be described through the accumulation of money, assets, or life experiences. An important equation to wealth building is focusing on increasing assets through savings and investing. This means growing income and/or lowering expenses.
To determine if you’re wealthy use the simple equation associated with net worth such as: Net Worth = Assets – Liabilities
A similar equation using different words is: Wealth = Income – Expenses
By increasing income or reducing expenses, you’re able to increase the amount of available money to save or invest.
Philosophically, wealth is a mindset that requires a understanding and prioritizing what’s truly important in living your dream lifestyle. You can be wealthy in life, experiences and friends without much monetary funds. Conversely, you can be wealthy in cash and assets and unhappy with the direction of your life.
How to Understand and Gain Wealth
There are many books, blogs, and gurus telling you what’s needed to obtain wealth. It all seems complicated and impossible. The honest truth is that financial wealth boils down to one equation.
Wealth = Money In – Money Out
Yea, it’s that simple. Increasing the amount of money you make and or decreasing the amount of money you spend impacts your wealth.
Lifestyle Inflation Impact to Wealth Building
Lifestyle inflation happens when your spending matches the increase in your income. You’re making more and spending more which results in very little saved to invest or save. Wealthy people desire to save and invest. To make money work for them as opposed to working for it. Instead of spend their days at work exchanging their time for a paycheck, the wealthy use money to make more of it. The goal is freedom to pursue their interest on their terms.
Wealth Is Not About Income Size
For example, John Smith makes $100,000 a year but has expenses totaling $98,000 per year. He manages to save $2,000 of his income.
On the other hand, Jane Diaz makes $50,000 a year and saves 10% of her salary. Jane has $5,000 in her savings account.
Who is the wealthy person in this scenario? Jane is wealthier with $3,000 more saved compared to Joe.