Here’s the simplest equation describing what we talk about everyday.
wealth = accumulated (income – spending)
There are essentially two ways to increase your wealth:
- increase your income
- decrease your spending
Do this and over time, you will accumulate wealth.
You are probably thinking that this is pointless, but sometimes we need a reminder because we over complicate personal finance.
Every time you wonder why you aren’t rich, you should ask yourself whether you are working hard enough on the right side of the equation. Have you exhausted all avenues of making more money? Do you live frugally?
If not, just spend some time brainstorming on ideas to improve the two things that matter: income and spending. Here are a few quick suggestions:
Increasing Your Income:
- Build passive income
- Ask for a raise
- Take full advantage of retirement accounts
Decreasing Your Spending:
- Cut up your credit cards
- Don’t look at advertisements as 40% off actually means you still need to spend 60% to get it
- Stop eating out already
- Call every company you are buying a service with and see if you get a better deal (TV, cell phone, car insurance etc)
- Search the web when something breaks to see if you can fix it before going out to buy a new one
I bet you can think of more to add to this list. Keep at it and increasing your wealth will become easier.
{ read the comments below or add one }
I think this is great. Increasing passive income, and compounding it, is really the key to growing wealth exponentially.
Know any broadband internet companies that cost less than $50 a month? Finding cheap TV is easy, once you have the internet paid.
“People shouldn’t have to work for what they get.”
So Joylene doesn’t want to work for what she gets. Sounds like a crook.
Hey, Joylene, where were you when the wealth was being redistributed upwards? In fact, it still is, as the country’s wealth gap has increased even under Obama.
Hang on to your money folks because the Obama and Democratic plan is redistribution of wealth. People shouldn’t have to work for what they get. It’s called Socialism and we will soon be like Europe. Who do you think is going to pay for Obamacare and our national debt? DUH!
Cut up your credit cards. Do that and see what happens.
This post is great because it’s so true. So true and so simple! Haha, we do get ourselves muddled up in the details sometimes, don’t we? And really this is the basic equation that should always be remembered in our minds.
I have a question. Is online banking really unsafe? I was told that everything in on the net anyway. All your information at your local bank is available on the net so it doesn’t matter if you go into the bank personally or not. I really like online banking and bill paying. Saves a lot of running around and postage but I want to know if it is safe.
I have thought some more about what I wrote, and have made a few “improvements”… I hope you all agree.
WEALTH = (Assets – Liabilities) + Passive Income + control over your time + low tax liability + good health to enjoy your wealth.
Wealth to me means the ability to control your time and money. Currently I am focusing on creating passive streams of income so that I can have control of my time. Once that is complete I will focus on how to gain control of my money, then I will be wealthy. Simple.
Craig: Yup Redbox doesn’t have blu-ray offerings (but I’m sure they will eventually).
Changing from blockbuster to netflix is definitely a change for the better. Hopefully as time goes on there will be an even better deal.
svend: I welcome the discussion 🙂 Like Carl was saying, there should be a summation in front of the formula so maybe it should be sigma n=0 to infinity (income – spending). That’d work out to be what you were saying (asset – liabilities).
It’s nice to read success stories like yours because it really helps us work harder 🙂 Hopefully one day we can all say “i have assets of $2m and can control our own time”.
greeting…
I have to say that I totally disagree with the wealth formula. Wealth is not about income… it is about assets and passive income. I would say wealth is more accurately written like this:
WEALTH = (Assets – Liabilities) + Passive Income.
Let me give a few examples.
A doctor makes $150,000 per year. Sounds good 🙂 Sounds wealthy 🙂 – NOPE. Doc lives in a BIG house that costs $4000/mon for mortgage, $1,000/mon for taxes. His kids go to expensive private schools. His wife stays at home and drive a Mercedes S500 @ $600/mon. Guess what… After all these expenses, doc has nothing left over… and if he starts loosing patients at his doctors office, his income can go down.
Now let’s take me… I make $40k-$50k per year as a web designer… and I live well within my means. I drive an Audi A8L (no payments)… I have a Harley Ultra Classic (no payments)… I have a nice condo on a lake in NH ($500/mon mortgage)… etc… etc… Here is where things get interesting… I have a net worth of over $2 million dollars. AND a passive income from my rental properties of over $7,000/mon. (by the way… net worth is assets minus liabilities). Am I wealthy? I think so… I have assets worth over $2m and if I stopped “working” tomorrow… I would still have income of over $7,000/mon for the rest of my life. And most important to me is I control my “time”. If I want to take a day or a week off anytime… I can… any month of the year. So to me true “wealth” is as follows:
WEALTH = (Assets – Liabilities) + Passive Income + control over your time.
Hope this helps stir some good conversation on what is “wealth” 🙂
Svend
@MoneyNingThere is a redbox in my area and have done it before. Thanks for the tip, and I would highly recommend it to most users. I love movies and feel that Netflix has a much larger variety of movies to offer than Redbox, also I like how it comes directly to my mail. I’m comparing Netflix to what I used to do and just go to Blockbuster. If I get 5-6 movies at $12 a month (I have blu-ray, another thing I’m not sure Redbox offers), it’s basically renting at $2 a movie opposed to $5 at Blockbuster.
marci: Do it yourself (DIY) is always a great way to save, not to mention the satisfactory when it’s done right.
Craig: You should really check out Redbox as well (if they are available in your area). It’s really great and you can pay as you rent even though it’s only $1 each time.
You couldn’t have made it any easier. Make more and spend less. People need to train themselves to get in the mindset to forget about sales and little purchases they don’t really need, or find more efficient ways to it. I am a movie buff and always found myself buying un-needed dvd’s. Now I have a Netflix account and never buy dvd’s saves money in the long run.
Another old saying: Wealth – It isn’t how much you make, it’s how much you don’t spend.
And my favorite tip for not spending money: Do it yourself, Do it yourself, Do it yourself. Or get by without it.
Carl: You are right. There’s a reason why I wasn’t the favorite in my math class 🙂
Greener Pastures: Investing the money you would’ve spent on something like coffee is a great idea. It’s another psychological way of helping yourself save and grow your wealth.
Good for you.
I bring my lunch to work now, and stopped buying that morning cup of coffee at work. I bring really great tea bags – so I don’t fell deprived, and it’s still a lot cheaper. The money i save from the coffee, I eventually use to invest in shares on sharebuilder.
I think this is a very good post. I would modify your simple wealth equation, though. Since building wealth means having more income than spending over time, I would add a summation symbol (or an integral) at the beginning of your equation.
My money saving tip is to watch tv on the internet. When I realized I only really enjoyed a couple of shows and could watch them for free on the internet I canceled my cable service and save $60 a month now.
If you signed up for Netflix($8.99) and the new Hulu Plus (7.99) you can pretty much watch everything except ESPN (which I will miss). That’s less than $20 a month while most people like yourself were or still are paying at least $60 a month on cable or satellite services. Crazy