“Wealth is just income minus expenses over time.. why do you need systems for that?”
Got that feedback from a subscriber last week.
After I replied we got into a great back & forth about “wealth calculus” which prompted this article.
I started by explaining that his formula wasn’t finished and shared a more complete one:
Wealth = (Total Assets - Total Liabilities) + (Income - Expenses) over time
When modeling wealth building it's essential to consider the broader picture, including assets, liabilities, and the impact of investments and changing asset values across time.
Wealth isn't just about accumulated savings. It encompasses the total value of what you own (assets) minus what you owe (liabilities)… and then how intelligently you use leverage.
This includes:
Assets: Bitcoin, Cash, investments (stocks, bonds, real estate), valuable possessions (art, cars, homes).
Liabilities: Debts like mortgages, student loans, car loans, and credit card balances.
We got into a very nerdy conversation about money math, and how you use it practically.
Think of building wealth like constructing a skyscraper.
You need a solid foundation, strong materials, and a well-engineered plan. Similarly, achieving your financial goals requires understanding the fundamental elements and how they interact. This is where Wealth Calculus comes in.
This isn't about complicated equations or obscure financial jargon.
Burn this math into your head and when you feel yourself violating it stop and analyze what you are doing and what the result may be.
The Foundation: It Starts with Savings
The journey to wealth begins with a single step: saving.
It's the bedrock upon which all other financial strategies are built. Without savings, there's nothing to invest, nothing to compound, and no fuel to propel your financial growth.
Our first formula, Income - Expenses = Savings, highlights this fundamental truth. It seems straightforward, yet mastering this equation is often the biggest challenge people face.
The Accelerator: The Power of Compounding
Imagine a snowball rolling down a hill, gathering more snow and growing larger with every rotation. This is the essence of compounding – earning returns not just on your initial investment, but also on the accumulated interest.
Our second formula, Principal x (1 + Interest Rate)^Time = Future Value, reveals the mechanics of this powerful force.
The Big Picture: Understanding Your Net Worth
While income and investments are crucial, they don't tell the whole story. True financial health encompasses all aspects of your financial life, including assets, liabilities, and the relationship between them.
Our third formula, Assets - Liabilities = Net Worth, provides a comprehensive view of your financial standing.
The Multiplier Effect: Diversifying Your Income Streams
In today's dynamic economy relying on a single source of income can be risky. Diversifying your income streams not only enhances financial stability but also accelerates wealth accumulation.
Our fourth formula, Primary Income + (Income Stream 2 + Income Stream 3 + ...) = Total Income, illustrates the power of multiple income sources.
The Power Behind This Simple Math
Now that we've laid the groundwork, let's explore each formula, exploring its nuances and practical applications in your quest for financial freedom.
Formula One: Mastering the Art of Accumulation
This seemingly simple equation holds the key to unlocking your financial potential. It emphasizes that wealth building isn't solely about how much you earn, but also about how effectively you manage your income and expenses.
How can you increase your income while keeping a mindful eye on expenses?
Maximizing Your Income
Negotiate Your Worth: Don't be afraid to ask for a raise or promote yourself. Research industry benchmarks and highlight your achievements to justify your request.
Explore Side Hustles: The gig economy offers numerous opportunities to supplement your primary income. Consider freelancing, consulting, online tutoring, driving for ride-sharing services and other instances of selling fractions of your time or fractional use of your assets.
Digital Gold Rush: Recall from previous posts here on Wealth Systems that creating digital products and services comes with significant benefits - receiving passive payments, automation in product delivery. Building up a portfolio of income producing digital properties increases your income without consuming units of time or other resources.
Invest in Yourself: Acquire new skills or certifications that can increase your earning potential in the long run. This will help you in discussions with primary employers and will also make you more attractive to business partners.
Optimizing Your Expenses
Create a Budget: Track your spending to identify areas where you can cut back. Use budgeting apps or spreadsheets to categorize your expenses and monitor your progress.
Differentiate Needs vs. Wants: Prioritize essential expenses and identify non-essential items you can reduce or eliminate.
Shop Smart: Compare prices, utilize coupons and discounts, consider buying used or refurbished items and remember everything is negotiable.
I’ve recently begun using Monarch Money for budgeting, goal tracking, real-time net worth calcs — it’s early into the evaluation but so far I have really enjoyed the visualizations and the ability to automate expense categorization.
It even lets you track your portfolio in real-time vs various benchmarks.
Automating Your Savings
Pay Yourself First: Set up automatic transfers to your savings and investment accounts each payday. This ensures consistent savings without relying on willpower.
Increase Savings Gradually: Start with a small percentage of your income and gradually increase it over time as you become more comfortable.
Utilize Employer-Sponsored Plans: Take advantage of 401(k)s or other retirement savings plans, especially if your employer offers matching contributions.
Back in the early 2000s I started auto-saving $50 per paycheck just to get the ball rolling and develop the habit. Now I am able to save much more than that thanks to having multiple income sources + inflows from revenue strategy and operations consulting.
One of the ways to maximize your income is compound what you do already to create extra value. I create so many research papers and diagrams for my B2B consulting business that I launched a Substack and placed them behind a paywall. Now I have a constant stream of new subscribers who are fellow experts and practitioners in my field — all from broadcasting work I’ve already completed.
Company leaders and investors are finding my substack and it’s generating consulting leads, too — a virtuous circle that is compounding.
Speaking of compounding…
Formula Two: Unlocking the Magic of Compounding
Compounding is the engine that drives exponential wealth growth. It's the process of earning returns not just on your initial investment (principal), but also on the accumulated interest.
The Time Factor
Start Early: The earlier you start investing, the more time your money has to compound. Even small amounts invested consistently can grow significantly over decades.
Be Patient: Compounding takes time to work its magic. Don't get discouraged by slow initial growth; stay focused on the long-term benefits.
Maximizing Interest Rates
Explore Different Investment Options: Research various asset classes (stocks, bonds, real estate) and their potential returns.
Understand Risk vs. Return: Higher returns generally come with higher risks. Diversify your investments to mitigate risk while aiming for optimal returns.
Consider Tax-Advantaged Accounts: Invest in tax-deferred accounts like 401(k)s or IRAs to maximize your returns.
Reinvesting Earnings
Don't Spend Dividends or Interest: Reinvest them to further accelerate compounding and maximize your long-term gains.
Consider Dividend Reinvestment Plans (DRIPs): Automatically reinvest dividends to purchase additional shares and compound your returns.
I used DRIP heavily from 2009 through 2022. Recently I’ve been taking the distributions and buying bitcoin instead due to concerns about central bank fiat supply interventions aka endless money printing.
Formula Three: The Holistic View of Financial Health
Net worth provides a complete picture of your financial position, encompassing both what you own (assets) and what you owe (liabilities).
Building Assets
Invest in Appreciating Assets: Focus on assets that are likely to increase in value over time, such as bitcoin, stocks, real estate, or a business — remember to look into e-commerce and other businesses with online models.
Diversify Your Portfolio: Spread your investments across different asset classes to mitigate risk and optimize returns.
Consider Long-Term Growth: Don't chase short-term gains; focus on building a portfolio that will generate wealth over the long term.
Managing Liabilities
Prioritize High-Interest Debt: Pay down credit card debt or other high-interest loans as quickly as possible.
Avoid Unnecessary Debt: Don't accumulate debt for depreciating assets or non-essential expenses.
Manage Existing Debt Responsibly: Make timely payments and explore options to consolidate or refinance debt at lower interest rates.
Monitoring Your Net Worth
Track Your Progress Regularly: Use personal finance software or spreadsheets to monitor your assets and liabilities. As mentioned above I’ve been using Monarch Money for that.
Analyze Trends: Identify areas for improvement and adjust your strategies as needed.
Celebrate Milestones: Acknowledge your progress and stay motivated on your wealth-building journey.
Formula Four: The Power of Diversification
Diversifying your income streams is like having multiple pillars supporting your financial house. It enhances stability and accelerates wealth accumulation.
Identifying Your Strengths
Assess Your Skills and Interests: What are you good at? What do you enjoy doing? These can be starting points for generating extra income.
Leverage Your Existing Network: Tap into your professional and personal connections to explore potential opportunities.
Exploring Income Stream Options
Active Income: Consider part-time jobs, freelancing, consulting, online tutoring, or starting a small business.
Passive Income: Explore rental income, dividend investing, creating and selling digital products (e.g., online courses, ebooks), or affiliate marketing.
Starting Small and Scaling
Begin with One Additional Stream: Focus on building one successful income stream before adding more — trying to build 3 wealth engines at the same time is a misuse of resources.
Gradually Increase Your Efforts: As you gain experience and confidence, expand your efforts and explore new opportunities.
Reinvest Earnings: Use the income generated from your additional streams to further invest and accelerate your wealth-building journey.=
While these formulas provide a framework for financial success, achieving your goals also requires cultivating the right mindset and habits.
Patience and Discipline: Wealth building is a marathon, not a sprint. Stay committed to your plan, even when faced with setbacks or market fluctuations.
Delayed Gratification: Resist the urge for instant gratification and prioritize long-term financial goals over short-term desires.
Continuous Learning: Stay informed about personal finance, investment strategies, and economic trends.
Emotional Intelligence: Manage your emotions and avoid making impulsive financial decisions based on fear or greed.
By grasping these core concepts, you'll gain a deeper understanding of your finances and unlock the tools to take control of your financial future.
By mastering these simple formulas and cultivating the right mindset, you can take control of your financial future and build a life of abundance and prosperity.
If you study how these different equations overlap, you realize adding assets and wealth engines is the key to success. Constantly develop assets. Acquire them, add value to them, use them in a way that creates more value vs previous configurations.
Understand that as you increase your “surface area” of assets your expenses will also rise — be mindful of overextending yourself by trying to grow several engines / opportunities at the same time. Stay laser focused on getting one component of your wealth system in a productive (and resource efficient) state before dividing your bandwidth and other resources further.
Embrace these formulas as tools to guide your path, adapt them to your specific circumstances, and celebrate your progress along the way. Never stop building wealth engines and improving the performance of your existing engines.
🥺 Follow our newly launched video channel Hacking Wealth. This video series focuses on the overlap between wealth and technology.
Wealth is the sum of all the value humanity has created while technology is the engine we've used to build wealth over time. The rate of wealth building is accelerating faster and faster thanks to AI, robotics and rapidly rising tide of technology.
👋 Thank you for reading Wealth Systems. I started this in November 2023 to share the systems, technology, and mindsets that I encountered on Wall Street.
💡The BIG IDEA is share practical knowledge that can be applied toward the development and refinement of wealth building systems.
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