2 Steps to Grow Your Wealth
Staring at the digits of your bank account, you might question why you are still unable to afford the new house, car, furniture or even the new iPhone.
As cliche as it sounds, wealth isn’t something that can be built overnight through a strike of luck, but by diligently saving and investing.
Writing from an accountant’s point of view, growing wealth is similar to filling up a leaking bucket. To make the water level rise, you have to pour more water than what is leaking out.
The more income you earn and the less you spend, the more you would have saved in your bank account. The converse is true, the less income you earn and the more you spend, the less you would see in your bank account.
Income = Money flowing into bank account
I would like to divide income into 3 main groups: salary, investments and profits.
Simply put, salary would be money that is received regularly from a job.
Investment income can be derived from, money received in the form of interest, dividend and rental.
Profits on the other hand is the excess money received from a sale of a product, after taking into account the cost of the product.
Expenses = Money flowing out of bank account
Similarly, trying my best to summarise common expenses we would arrive at 4 types of expenses: daily/recurring expense, capital expense, financial expense and medical expense.
Daily/recurring expenses constitute utility bills, insurance premiums, food and beverage to name a few.
Capital expense can be classified as money invested in assets that would generate a return like stocks, bonds, crypto or even property.
Financial expense on the other hand constitutes loans, debt which one borrows or lend.
Lastly, medical expenses can be sudden expenses like seeking medical treatment.
Savings = What is left
The remainder of your income that is left after spending on the above expenses, would constitute your savings.
Two ways to increase your wealth would be to either increase your income or to decrease your expenses.
Imagine being a waiter at a restaurant earning $10/hour. For a 10 hour workday, your salary would amount to $100/day. Now, take this $100 and lend $10 to the bank to earn 0.50% interest a day, you would be earning $0.05 a day. With $90 remaining, you decide to buy a house with $50 and rent it out for $1 a day, buy $30 worth of stocks that give you a $0.01 dividend a day. With $10 remaining you buy a piece of art that you decide to sell for $20 on eBay earning you a profit of $10.
The beginning capital of $100 helped you to earn a return of $21.06, constituting 20% of your initial capital. In other words, $21 would be what you have saved at the end of the day.
In summary, increasing your income and minimising your expense is a key formula to accumulate wealth.
Disclaimer: Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
