What is Wealth?

Wealth

Understanding how to generate wealth

First and foremost, you must remember that money is only a tool to get you resources and time. It is a great tool, as both are of great value to you but it shouldn’t be your end goal.

Understanding how to generate wealth will be something amazing for your life and ease many things. Because believe me, life with no wealth and no money can be a very hard and harsh life.

As long as you learn to not get sucked into the generation of wealth too much as to forget the other things in life such as : health, relationships, character and what you want to accomplish, that are more important, it will be one of your most powerful tools in bringing you a good and happy life.

As I like math, let me put it in a formula to illustrate it.

the formula of the generation of wealth:

(wealth you already have + Income – spending) x (rate of investment return - inflation) = your wealth

It’s a simple formula. But it tells you exactly how you generate wealth. And how your wealth will develop in the future.

It sounds simple right ? But a lot of people who have great income still end up in financial distress.

And that happened because they didn’t understand this simple formula.

So let me explain it to you, We must first look at what variables we can influence and those we can’t :

In red are the variables we can’t influence and in green those we have some influence on.

We can’t influence the wealth we already have as that part has already been played and is in the past, and we can’t influence the rate of inflation as it is wholly outside of our control. So, let’s skip those variables.

we will still explain what is inflation and its rate can go up or down in a later article as it is still a variable of the wealth formula and it is important to understand it.

The green ones are the ones we want to focus on to influence the result.

Now we could be pretty happy with that formula and go ahead and explore how we can influence those green variables, but I would say that it is an incomplete formula. And an incomplete formula can be incredibly dangerous for you and your future, giving you flawed assumptions, leading you astray.

Why is it incomplete do you ask ?

Well, because it gives us as a result “wealth” as though it should be the only thing we should focus on. But I would argue that we need a better formula to complete our thinking :

Your Wealth - the cost of getting that wealth to you - Wealth you need to be satisfied and happy

= Value your Wealth brings to you

And I would argue that this formula is even more important than the first one.

Because your Wealth could be enormous but if it gives you poor health, bad relationships, comes at the cost of your character, and even after all that it still isn't enough for you to be satisfied and happy, then what is the point ?

The good news about this formula is that you can actually influence all the variables to bring you the result you want and create the gap between what you get “your wealth” and the “wealth you need to bring you satisfaction and happiness”.

A lot of times there is too much effort put into the “your wealth” part of the formula and not enough on the other part of the formula.

What wealth brings you often has a psychological aspect to it.

You have a lesser need for wealth if you have less desires.

You have less desires if you understand where those desires come from, and if you are aware of what pushes you to want those things and ask yourself if they really matter.

Another part of the formula is the cost of building of that wealth. People tend to forget that increasing income and decreasing spending can sometime, not always as we will see in later articles, come at a cost, and your wealth probably won’t be worth it at that point.

Another point of interest in that formula is : what is that “value that wealth brings to me” ?

There is the obvious answer: things you may want to buy in the future and resources you may need.

But another thing that wealth could bring you that is more important, is having money on the side for life unpredictable moments. Life is unpredictable and incidents, health issues, loss of income, robbery and crises will happen all throughout your life.

Only saving for a goal would make sense in a predictable world. But ours isn’t. Think of saving as the shield against life inevitable ability to surprise you at the worst possible moment.

Another advantage is gaining control over your life.

Everyone knows the tangible stuff that money buys. The intangible stuff is harder to wrap your head around, and it can go unnoticed. But the intangible benefits of money I would argue can be far more valuable and capable of increasing your happiness than the tangible things that are the obvious target of our savings.

Savings that act as your shield without a spending goal give you options and flexibility, the ability to wait for the right opportunity. It gives you time to think. It lets you change the course of your life on your own terms.

What is the return of the cash that is sitting at the bank doing nothing? It gives you the option of changing job, retiring a bit earlier, helping your children in a difficult time, or simply the freedom from worry.

I’d say it’s incalculable.

When you don’t feel like you have control over your life and time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility, you have the time to wait for great opportunities to fall in your lap. This is a hidden return of savings.

Savings in the bank that earn you 0% or low interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.

I would say those are great avenues to explore first and to always keep in mind before getting into the “your wealth” variables.

But let us continue and explore the formula of the generation of wealth you came here to understand and the green variables you can influence:

1. Income

2. Spending

3. Rate of investment return