Formula for Wealth

Since I've talked about savings/investments already, I thought I'd go back to the basics. We've all heard people talk about wealth and how to accumulate it, but its always been pretty complicated. Here is a simple formula that I show all my clients which is just the bare basics. The "Wealth Formula" or the formula to creating 'wealth' is:

MONEY
+ TIME
+/- RATE OF RETURN
- INFLATION
- TAXES
__________________
WEALTH

1. In order to create wealth, you need to start off with your own money. Whether it be lump sum contributions or regular (monthly, weekly, bi-weekly etc..) contributions, we need to start somewhere.

2. Time is a very important thing. A lot of people wait to start investing, which usually results in them not having enough money in retirement. Some excuses they use are "we'll wait until the kids are out of the house" or "wait until my debt is paid down" or the like. Most people will tell you, that some of those excuses will never pan out. You need to give your money as much time to compound as possible, so that you can live the type of lifestyle you want to live. Accumulating wealth is not done over-night; it takes years, sometimes even decades, to do it. Even if it's a small $25/month, start somewhere and then gradually increase.

3. There is always a rate of return that dictates how much return we get on our investments. You can either have a positive or negative return; obviously we all want a positive one. This kind of ties into point #2 of time, the longer you keep invested, the better chances you have of having a positive rate of return; your money will have time to compound and go through the market cycles.

4. This point is something that the vast majority of people overlook. Inflation pretty much erodes your purchasing power. In English: A dollar today is not worth a dollar tomorrow, as cost of living continues to increase - examples include Gas, Groceries, Clothing, Homes etc.. When investing, you must make sure that you're beating inflation, otherwise even though it might seem that you have a 'positive' return, you might actually be 'losing money'.

** As a side note: We often hear the Government and/or Bank of Canada talk about Inflation levels and what their 'target' inflation is. It would, however, be a little difficult for the government to back up their claims for the inflation numbers they give us (whether its 1.5% or 2.0% or whatever they tell us). The reality is, the numbers the Government/Bank of Canada  use when telling us about the current inflation rate, are not entirely accurate, as they don't take into consideration all the things they should, and they're not all weighted the way they should be. For example, they can tell us day and night that the inflation number is 2.0%, but we all know that prices for goods and services have increased much more than 2.0% -- just check your gas and grocery bills!

5. Like I said in my previous post, the only thing certain when living in Canada is death and taxes. Taxes can take a HUGE chunk out of your investments, especially if the plan is not set up properly. Have a financial professional help you with setting up your portfolio so that you can reduce and sometimes even eliminate taxes altogether. Wouldn't it be unfortunate to have to give 30% or 40% of your hard-earned money to the government when you're ready to retire?

A proper financial plan will take a look at every point discussed here. These days too many institutions are just focused on taking your money and don't set up a proper financial foundation with you. Building a strong financial foundation will drastically increase the chances of you retiring successfully and living the type of lifestyle you want to live!

If you have any questions about anything discussed, please do not hesitate to contact me!