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Here on Reel From The Real, i write what i’ve learned in investing x personal finance.
My goal is to:
share optimistic and positive energy - because the hustle is real x rough enough
personalise personal finance that bit more.
😎 To your wealth,
Aila Obiocha
You guys know by now that I define investing as the game of building personal wealth. But if I could summarise everything I’ve learned about wealth in one simple equation, it would be this:
Wealth = [ Earnings minus Expenses] x ( 1 + Growth rate ) ^ Time
You take Earnings, minus Expenses, multiply by a certain Growth rate, and raise all of that to the power of Time.
It’s a wealth-centric spin on the Future Value equation that’s taught in Finance classes: Future Value = Present Value x ( 1 + r ) ^ N
Wealth = [ Earnings minus Expenses] x ( 1 + Growth rate ) ^ Time
I absolutely love this equation for two reasons. First, because in a single line, it shows us practically every variable that really matters. The fundamentals. Second, I love anything that reminds us of the significance of psychology in investing.
When it comes to personal wealth, attitude > algebra, and behaviour > math.
The wealth equation. It’s simple. insightful. A compass. A reminder.
Let’s look at each variable in detail.
The first variable: Earnings. It starts with earnings. You must have a source or two (or five) of income. Yes, it does take money to make money. Earning first, earning well and earning more are absolutely critical to building wealth. We simply cannot get started without it. Income is the seed of wealth. This is the first variable. Getting rewarded as much as possible for your labour is what you must do to solve the wealth equation in your favour.
“The trick to money
is having some”
- Stuart Wilde
The second variable: Expenses. Poverty is a Force powered by gravity, which means your earnings will freefall into your expenses, unless you put a wedge between them. Allow me to repeat this, because no matter who you are, or how much you earn, unless you drive a wedge between your earnings and expenses, your earnings will freefall into your expenses. Please do not be deceived. Make no mistake. Money has a way of waltzing right back out the door (or window), unless you stop it. This is the second variable. Break up the love affair between your earnings and expenses.
If you succeed at the first two steps, then congratulations, you have savings which you can now employ in the wealth equation. This takes us to the third and fourth variables.
The third variable: Growth rate. This is where the magic of investing comes alive. Just as a force can accelerate upwards or downwards, your money can be growing at a positive rate or a negative rate. In the right investments, your money should be earning more money for you. In the wrong investments, you may lose even the savings that you started with. The Growth rate is where we can see clearly the Matthew Effect at work in our financial lives. This is the third variable. The direction in which your investment grows is more important than speed.
For to everyone who has
will more be given,
and he will have abundance;
but from him who has not,
even what he has will be taken away
- Matthew 25:29
Let’s not forget about inflation - that one-size-fits-all, negative growth rate - which absolutely reduces your wealth over time. If inflation is 5%, and your investments are growing at 5%, well then, your wealth is growing at a grand total of 0%. This is why compound interest is so powerful. In order to build wealth, we need to grow our money in a positive direction, and at a faster rate than inflation.
Compound interest is the 8th wonder of the world.
He who understands it, earns it.
He who does not, pays it.
- Albert Einstein
The fourth variable: Time.
Wealth. Takes. Time.
It takes time. Wallah, I wish it were not so, but it is. This is the fourth variable. It doesn’t matter what asset your money is working in, it takes time (yes, even in crypto 👀 👀 ). It may take a little time, or a lot of time, but it will take time.
“The greatest shortcoming
of the human race
is our inability to understand
the exponential function”
- physicist Albert Bartlett
So there you have it. That’s Wealth.
It takes earning all you can. Hustle.
It takes saving all you can. Discipline.
It takes growing as fast as you can. Opportunity.
It takes time. Patience.
Ever wonder why you never hear about ‘getting wealthy quick’?
You may get rich quick, sure, but wealth will take her time to attend to you.
You don’t hurry her. She is fashionably and intolerably late.
Here’s to you. Here’s to me. Here’s to us.
May we succeed in solving the wealth equation.