“I want to be rich.” Yes, I’ve heard that before.
I do, too. Who doesn’t?
But what does being rich mean?
One’s definition of rich might include a measure of income, net worth, possessions, family, friends, quality of relationships, time, or other items.
Many of these things come to mind. I view these items as different types of wealth.
Income, Assets, and Wealth Formula
Regardless of the definition, here is a formula to remember if you want to build wealth:
Income + Assets = Wealth
If you increase your income and assets, you should be able to increase your wealth.
For the purposes of this discussion, I consider wealth in the financial sense but also as a means to facilitate the creation of other types of wealth.
1) Income
As defined and highlighted on Investopedia:
- “Income is money what an individual or business receives in exchange for providing labor, producing a good or service, or through investing capital.”
- “Individuals most often earn income through wages or salary. Businesses earn income from selling goods or services above their cost of production.”
- “Tax authorities treat income earned through various means differently.”
Generally, if you’re able to earn a higher income, you’ll have an easier time acquiring assets and generating wealth.
Whether you have a job that earns a regular paycheck or you own a business that delivers a service or product, the key is to increase your income.
Of course, you also need to have income leftover in order to utilize it for the next purpose.
2) Assets
Acquire assets. Build assets.
Going back to the definition of income above, one part of the above is the focus of assets: “through investing capital”
Assets have both the ability to offer income and capital gains.
There are different types of assets and each can serve a separate yet related purpose.
Keep obtaining assets that put money in your pocket.
3) Wealth
Similar to being “rich”, wealth can mean various things to different individuals.
A set number or net worth.
An amount of time.
Whatever is important to you.
Regardless, it’s important to consider what you want to do with the wealth that you’re working to create.
Find Balance and Still Get Wealthy?
Here are three considerations on how to adjust the “feel” and time it takes to get to your goals.
1) Increase your income and/or the return on your time
This is easier said than done.
However, one’s income potential is much greater than the ability to reduce expenses, which to some extent is finite.
Whether this is focusing on your primary full-time job or multiple activities, focus on return on investment of not only your assets but also your time.
For example, if you’re a salaried employee making $50,000 a year and you work 40 hours a week (assuming 52 weeks per year), you’re making approximately $24 per hour.
However, if you’re also working for $50,000 a year and find yourself doing 50 hours per week, your rate of return is much lower on your time.
Overall, you’re trying to reduce the amount of time required if you are a salaried employee to utilize your time elsewhere.
If you have a side hustle or additional job, whatever the case, utilize this as an opportunity to deploy that capital elsewhere.
And remember – there are various types of income.
If you can take care of your income, it’s easier to utilize it for the next purpose.
The key is having some type of cushion leftover in order to invest in assets.
Otherwise, you remain in the same hideous cycle of earn spend, earn spend, earn spend.
2) Acquire or build assets – enjoy the process
Assets either put money in your pocket in the form of reoccurring income or appreciation in value that can provide capital when sold.
The different types of assets that generate income or appreciate and value come in various flavors and types.
Depending on your investment objectives asset selection is key. However, nothing will have a greater impact on your ability to generate income from assets than the amount of money you invest.
This comes from the residual income you have left in order to invest.
The different types of assets utilized should also serve a specific purpose in your investment portfolio.
Some assets are meant for growth while others are intended to provide protection.
For growth and income, my three favorite assets are dividend stocks, real estate investment trust (REITs), and real estate crowdfunding platforms.
I primarily focus on acquiring assets, but you can also build your own.
I find building your own assets more challenging, however, the rewards can also be very enticing.
3) Build wealth – it’s ongoing
This is a sensitive topic for some while others find it enjoyable to discuss.
Wealth could be the ability to reach a target level of savings/investments. For example, 25 times in savings of your annual expenses.
It could be generating enough income for example 4% of your savings to withdraw each year. It could also be reaching a number that enables you to cover your expenses.
That’s on the financial side. However, there is more to it.
Again, wealth can be your time, capabilities, experiences, and other activities that fulfill happiness well-being and other desires. Keep this in mind.
The purpose of reaching a milestone shouldn’t be the end goal.
Rather the progress in the journey should be why you participate in the first place.
Yes, reaching your goal is a reward of your hard work and sacrifices however you should also have something in mind to continue to do when you do.
There are some other ways to either increase the speed at which you’re able to reach your goal.
Other Thoughts
Here are a few other considerations.
Change the goal itself
So maybe this is a form of cheating.
I don’t think so, but be realistic about how much do you need to live a certain lifestyle or to meet your other personal needs.
Sure, I’d love to have a billion dollars, but I don’t need that much to sustain or reach the lifestyle that will make me happy.
Change or keep the goal but add a variable in your favor
This could take on different forms.
Maybe your goal is to acquire enough money to never have to work again in your life.
But what if you could achieve that goal much sooner?
Perhaps you can find part-time employment or an activity that is less stressful that can be used to augment your income.
Another example, in addition to part-time work, might be to focus on some type of product you create or business you want to pursue.
Related: Side Hustling: The Fruition of (Potential) Frustration
Interests or “what you love” doesn’t always equate to success – or can it?
I have an interest in personal finance and personal fitness.
I don’t currently use these as my primary forms of income.
But I could see myself dabbling part-time in them if my other expenses could be covered from savings and investments.
I also enjoy teaching and history.
For quite some time, I wanted to become a history teacher.
However, I didn’t find the ability to only do it as a part-time basis and still be able to meet my personal capital needs.
Yes, not all of these activities contribute to my income or ability to acquire assets and build wealth.
They do make things enjoyable for me though.
Recap
Increase your income and save the difference.
Invest your extra income and keep acquiring and building assets.
Define and build your wealth.
It’s that simple. It’s just much harder to stick with it day in and day out.
Just keep at it. Slow and steady, getting dividend heavy.
Related:
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
You can tell a lot of thought and inspiration went into this article. Good advice for anyone, regardless of age or wealth. Nicely done.