The Simple Formula for Building Wealth

Too many people overcomplicate wealth creation. “How do I build wealth?” they ask. They get fancy with complicated investment strategies, contrarian advice, and conflicting information which ultimately leads to confusion. And worse yet – the finance industry is chock full of grifters selling “Get Rich Quick Schemes” to line their own pockets, not yours.

Here’s a simple formula for Building Wealth:

Income – Expenses = Wealth

Wait… that can’t be it, can it?!

Yes, it can.

Allow me to explain.

In a business, income is defined by revenue – the amount oof money coming through the door. Businesses sell their products and services to customers in order to generate revenue. You are no different from a business. You sell your products and services (typically, through a job) to your employer for income (typically, a salary or an hourly wage).

And so the first step to build wealth is to increase your income.

Step 1: Increasing Your Income

There are a number of ways you can increase your income. You can:

• Ask for a raise

• Start a side hustle

• Sell your belongings

• Get a 2nd job, or a freelance gig

• Invest in income-generating assets

For most people who have a full-time job, asking for a raise is likely the easiest and most realistic option for increasing your income.

And although the economy is facing serious headwinds, it is important to remember that inflation has been increasing all over the world.

Generally, salaries are expected to increase at a pace on par with inflation. There are many methods to building a case for a salary raise, but regardless of your performance, asking for your salary to keep up with inflation is an easy ask.

Now that you have your income secured, it’s time to consider the 2nd part of the Simple Wealth Formula.

Step 2: Decrease Your Expenses

The concept of reducing your expenses in order to become wealthy has become somewhat of a meme in recent years.

“You can’t get rich by saving on lattes and avocado toast!”

Yes, you can.

In fact, the percentage % of your income that you save is THE single determinant of when you can retire.

Allow me to explain with a simple chart, that may shock you:

This chart assumes that you can make a reasonable 5% return on your investments, and can live comfortably with a 4% withdrawal rate. This also is based on the % percentage of your income you save after taxes.

As you save a greater percentage of your pay-cheque, you’re able to grow your nest egg faster.

But importantly, you’re also able to live off of a smaller portion of your income.

At a certain point, your nest egg grows to a point where the annual return from your investments exceeds your living expenses.

It’s at this point, that you can confidently retire.

Step 3: Building Wealth

Now the critical step required to make this formula work smoothly is in examining the assumptions.

When you’re just starting out on your wealth building journey, there isn’t much you can do about your effective tax rate. We’ll save that for a future article.

The key lies in the 5% return on your investments.

Now, there isn’t a single answer on how to achieve this. You can invest your money in bonds, stocks, Bitcoin, crypto, real estate, and alternative investments like wine and fine art. The world is your oyster.

That said, each of these investments have a very different risk profile. For example, a lot of new investors are drawn to crypto. However, there is a very large risk of losing all of your money.

Wealth Potion will be covering these topics, and more, in future articles. Subscribe to our newsletter below so you never miss a post.

In the meantime, work on increasing your income, and decreasing your expenses.

Your future self will thank you.

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