2 Formulas for Building Your Net Worth

Building long term wealth is actually quite simple when you think about it.  Today we’ll look at really the only two formulas you need to know in order to build wealth (sorry, I literally mean formulas).  Along with these two formulas, the last part is the psychological…you really have to want it.

The Accounting Formula

Day 1 of Accounting 101 teaches you a basic accounting formula:


or put another way

Assets- Liabilities= Owners Equity

It’s a basic formula for figuring the equity in a company.  You can also use it for calculating your net worth.  For today, I want you to make some substitutions to the equation to make it apply to your monthly budget.  We’ll substitute Assets for Income, Liabilities for Expenses, and Owners Equity for Surplus or Shortfall.

With these substitutions, we are making a simply definition of showing our personal cash flows for a given time frame:

Income – Expenses = Surplus or Shortfall $

Ideally you want this equation to be positive for each month.  For example, monthly income of $4000, minus monthly expenses of $3000, equals a surplus of $1000.  The excess cash flow allows for flexibility.  With the positive cash flowing in, you can buy things, save for a rainy day, invest, etc.

If your doing this equation, and the answer works out to be negative…you need to either increase your income (which can be hard to do) or look at ways to cut down on expenses.  Also, if your monthly budget is coming up short, this is an emergency.

For those with surplus money at the end of each month, this allows you to go into the finance formula to building long term wealth.

The Finance Formula

The second equation to building long term wealth is taught in day one of finance.  For simplicity sake, we’ll use the future value of a single cash flow.  It looks like this:

FV = PV(1+r)^t

or put another way

Future Value = Present Value (1+rate of return)^time

What this formula is used for, is to calculate the future value of you current investment over a specified time frame.  For example, the $1000 surplus mentioned above invested for 10 years and earning 8% would be worth $2158.92.

Now I should be using the future value of a series of payments, but don’t want to scare off readers with that formula.  But so far we have just used one month as an example.  Now imagine instead of just doing this for one month, you did it every month for 10 years.  Hopefully you see the point here.

We can even combine the formulas and come up with:

Income – Expenses = Surplus(1+r)^t

Meaning investing your excess monthly income each month to build future wealth.

That’s really all there is to it, when you think about it.  The first accounting formula says to live on less that what you make (live below your means) and the second formula says invest your extra money and let it grow and have compounded growth over time (even Einstein thinks compounded growth is cool).  Doing these two things will get you on the correct direction for building long term wealth.  Don’t forget the last part…you have to want it and put the effort to make it happen.

Being that my site is focused on stock investing, this is my personal preferred way of having your money grow over time (the “r” in the second formula).  But there are other ways as well, such as real estate or starting a business.

Follow me on the social medias:

Readers Comments (37)

  1. Great explanation of the formulas.

  2. how does cialis work nxmmcikt http://tadedmedz.com/ which is better – cialis or viagra

  3. viagra from canada viagra online canada
    cvs viagra

  4. no prescription viagra viagra from india
    viagra walgreens

  5. cialis patent expiration cialis without a doctor’s prescription
    canada price on cialis

  6. Hi, i think that i saw you visited my blog thus i came to “return the favor”.I am attempting to find things
    to enhance my website!I suppose its ok to use some of your ideas!! https://cialis.bee-rich.com/tadalafil

  7. You made your position extremely effectively!!. https://kamagrajellynow.com

  8. propecia efectos secundarios irreversibles https://finasteride1.com/# – hair loss treatment

  9. buy discount viagra http://himpills.com buy cialis online in usa Istzsvjn what are the different dimensions of health?

  10. levitra coupon 3 free pills – https://levitraoffer.com/ generic levitra canada pharmacy

  11. levitra price increase http://levitradd.com/ – levitra vs viagra dosage

  12. My spouse and I stumbled over here different website and thought I
    may as well check things out. I like what I see so now i’m following you.
    Look forward to checking out your web page repeatedly.

    asmr 0mniartist

  13. buy cialis 36 hour online: ed pills – monthly cost of cialis without insurance

  14. Для твоей анонимности наша команда создали этот сайт на котором Вы ежедневно сможете иметь доступ к магазину торговой платформы hydraruzxpnew4af onion image . Скопировать ссылку на hydra и неопасно совершить приобретение можно на просторах этого ресурса. В интернет паутине веб нередко нарваться на мошенников и упустить личные средства.

  15. https hydraruzxpnew4af – платформа быстрых закладок в темно интернете Hydra onion.

  16. viagra without prescription: viagra 100mg – 100 mg viagra lowest price
    ed pills that work better than viagra

  17. price of doxycycline: buy doxycycline without prescription – doxycycline online

  18. hydraruzxpnew4af union в обход — огромный подпольный магазин в русскоязычном пространстве. Постоянно ресурс посещают около 1 млн пользователей! Этот результат портала не есть случайностью, ресурс заработал отличное уважение пользователей как образцовый и полезный сайт. У него самый роскошный сервис в сравнении остальных магазинов подобной ниши, работает постоянно исправно и без падений. Всякие случаи вывести из строя ресурс молниеносно решаются методом формирования сайта-зеркала.

  19. buy ivermectin nz buy stromectol – stromectol prices

  20. viagra discount blue pill viagra – best over the counter viagra

  21. liptor atorvastatin – buy lipitor 10 mg

  22. stromectol 6 mg tablet stromectol – stromectol how much it cost

  23. can you buy cialis with no prescription cialis with no prescription – where to get generic cialis without prescription

  24. Howdy! Do you know if they make any plugins to assist with SEO?

    I’m trying to get my blog to rank for some targeted keywords but I’m not
    seeing very good gains. If you know of any please share.
    Thank you!

  25. Hi, i think that i saw you visited my weblog thus i came to “return the
    favor”.I am trying to find things to improve my website!I suppose its ok to
    use some of your ideas!! quest bars http://bit.ly/3C2tkMR quest bars

  26. ivermectin 1mg buy ivermectin online – ivermectin rx
    ivermectin brand name

  27. comprar cialis por correo

  28. online prescription for ed meds ed tablets – cheap ed pills

  29. Hi there, I enjoy reading through your article post.
    I wanted to write a little comment to support you.

    click here= 안전놀이터

  30. Laxsum Frusemide To Buy

Comments are closed.