I believe that wealth is a lifestyle that can be strategically designed. However, the keys to any strategy are clearly defined goals, well thought-out plans, and variables that can be influenced for tilting the probability of success in your favor. Let's explore how we turn the idea of building wealth into a tangible goal using three steps.
Defining Wealth
I often associate wealth with financial independence. I define financial independence as the point where someone has enough resources to live life without being employed or dependent on others. So my definition of wealth is reaching a financial point where I can live off of my assets without needing a job. This is a goal that I have been working towards for quite some time now, and it requires a lot of planning, patience, sacrifice, risk, and luck.
A few years ago, I realized that I was leaning heavily into the patience and sacrifice portion of my plan. While it felt admirable to be so dedicated to my long-term success, I also found that I was emotionally burned out and discontent with my progress. I found myself repeatedly asking, what was the point of working so hard and saving so much money if I wasn't allowed to enjoy it until some unspecified time in the future? Something needed to change, but what? This was my cue to revisit my strategy and create more focus.
Breaking it Down
My engineering training kicked into gear as I continued to study personal finance. I realized that personal finance is essentially an equation. The variables that you can play with are your income, spending, savings, investing, and asset protection. Once these variables are balanced at zero, everything above that point is considered excess.
Translation: If you sum up all of your income, savings, and investments, then subtract the total of your spending from that amount, you should be left with a number referred to as your Net Worth. The position of that number on the number line relative to zero tells you whether you are indebted or debt free. Asset protection is considered a part of your spending, so it is absorbed into the equation.
The net worth is only a guideline because numbers never tell the whole story. Even if a person's network indicates that they are debt free, the closer they are to zero, the harder it is to meet the minimum standard of living. When a person or community lacks the financial resources for a minimum standard of living, this is known as poverty. This information gives us an idea of where the zero should be set for the bare minimum of financial independence.
The CFPI Wealth Baseline Equation
So my new equation for Wealth looks something like this: (Income + Savings + Investing) - Spending > Poverty Line
The translation for this equation is "To meet the wealth baseline, your net worth must exceed the poverty line without the need for employment or dependence on someone else." Once you exceed the poverty line, an increased level of wealth primarily increases comfort. The fascinating observation about this equation is that staying above the poverty line is the only restriction on your assets (income, savings, and investments) and your debts (spending) meeting the criteria for wealth.
That means finding ways to increase your assets and lower your debts are the key to building wealth. Although this is intuitive to many, this equation provides the foundation you need to start planning.
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