The Philippine Online Chronicles

From the previous articles on money, combining everything will give us the Wealth Formula, the secret to wealth creation. Knowing the allies and the enemies of money and knowing what to do with them will help us create our wealth.

In wealth creation, before proceeding with the wealth formula, there are three factors to consider: knowledge, mindset, and action.

Knowledge – This is an essential factor in determining the financial standing of a person. If one is ignorant of the financial principle governing money, he will end up worse than he is now since he will be making uninformed financial decisions. Chances are he will be scammed or invest blindly. He must be aware of the economy, markets, interest rates and interest behavior, asset classes and investment products. He also has to understand how to interpret financial statements, investment strategies and risk management.

Mindset – This is the most powerful factor of wealth creation. There is a saying that goes like this:” Whatever the mind can conceive, it can achieve. In other words, we are what we think or perceive to be. Correct mindset covers the interaction between you and your environment and the process of adjusting your thought process to think rich.

For example, the poor and middle class generally think that money is scarce and hard to come by. Saying "Money doesn't grow on trees" and "I can't afford that" will not help. In contrast, those who are wealthy see a world of opportunity and abundance. They see money as little more than a concept or idea is and simply the by-product of providing value to others.

A good example is the story of Jeff Bezos. He noticed that bookstores were severely limited in the amount of books they offer their customers due to geographic and physical constraints. He also observed that bookstores could only service customers that lived near them and could only stock a limited number of books in their shelves and stockrooms. He saw an amazing opportunity to solve these two problems by giving access to anyone anywhere via the Internet and offering a catalogue that is 40 times the size of a large bookstore. Jeff founded the multi-billion dollar company Amazon!

Action – Action is the critical factor in wealth creation. The importance of action in achieving wealth is obvious. Nothing can be achieved without action. As RFP Pastor Chinkee Tan wrote in his book, many people suffer from the syndrome to the point that after gaining all the information, no action is taken. This is what he calls “analysis paralysis. He reminds us that mindset plus action equals result.

Wealth formula

Knowing and putting to heart the above factors, one can start using the wealth formula to his advantage. From the previous articles on the series, the wealth formula can be written as:

True Wealth = Money + Time + Leverage + Positive Rate of Return –Inflation – Tax

Money – Money for investment can be earned from income and business. The biggest mistake one can make is assuming he doesn't have money to save. Investment money should start from 20% of income that has to be regularly saved so that it can be put to work. Remember the story of Joseph in Egypt where he saved 1/5 of the harvest during bountiful period in preparation for the drought. Make money your slave instead of the other way around . Unlike human beings, money can work 24/7 without complaining.

Time – Time is the most precious and yet neglected component of wealth creation. It can be an ally or enemy. We always hear people say “the earlier the better.” A slight delay can cause a negative impact on one’s quest for financial freedom. Time is money and there is always a cost implication for procrastination. The longer one waits, the more money he will need to save each month to make up for lost time.

Leverage – Leverage is maximizing the proper use of other people’s resources like money, time, and effort. This is one of the best ways to earn income with the least effort. A good example is owning and managing a business, whereby one hires people to work for him. Another example is investing in pooled funds.

Compounding Interest – To create wealth, the rate of return must be higher than inflation. Interest earned should be re-invested to create an interest-over-interest income. Even a one percentage point interest can make a big difference in the long run.

Inflation – This is the factor that erodes money’s purchasing power. In layman’s terms, inflation is associated with increase in price of commodities.

Tax – This is the debt we owe the government for our existence. Even in death, we still have to pay taxes. As the saying goes, “death and taxes are the certainties in our lives." There is no way we can avoid taxes but we can minimize its effect on us by learning ways to grow money with minimum taxation.

Anyone who can achieve result with a positive value is on his way to create wealth.

Using this, one can easily learn where his wealth creation strengths and weaknesses are and where he needs to concentrate his efforts at improving.

Photo: “Piggy Bank and Calculator” by Images Money, c/o Flickr. Some Rights Reserved