If you want to improve your finances to increase your wealth, first you need to understand what is wealth. There are a few key points:
Wealth Isn’t Equal To Your Income
There is a simple story: Peter earns $10,000 dollars a month but spends all his earnings; Jack earns $5,000 dollars a month but only spends half of them. Is Peter healthier since he earns more? The answer is an obvious No. How much wealth do you have doesn’t only depend on your how much you earn (income), it also (especially) depends on how much you spend (expense).
Second simple story: Peter saves up $1million dollars and stores the cash underneath his bed; Jack saves up $1million dollars and puts it in an investment/business which earns him 4% return per year. Who will be wealthier? In short, to become wealthy, you will need to build your income, manage your expense, protect, and grow your net worth.
It Is Easier And More Effective To Control Your Expense Than Income
We all want to increase our earnings, that’s why we study hard to land a good job, work hard to get a good salary, find side hustles to boost income, start a business or pursue higher investment returns. All of these are very good things, but not easy. It takes time, effort, energy, resource to grow your earning power. In addition, you might lose your high paying job or fail at your business or investment one day due to some unforeseen circumstances. However, it is far easier to control your spending, only buy what you need and don’t waste money. Our ancestors had taught us be frugal for thousands of years.
In addition, saving is more effective than earning the same amount. If you save $10 dollars, your wealth immediately increases by $10. If you earn $10 more, you will still have to pay some tax on this $10 and eventually your wealth may increase only by $8 or $9, not to mention in real life, you will most likely choose to spend a portion of this $8 or $9 (let’s go celebrate!), so your wealth may only increase $4 or $5!
Weath = Income – Expense + ‘Peace of Mind’
In financial terms, what you earn minus what you spend is your net earnings (in cash flow perspective), what you own (assets) minus what you owe (liability) is your net worth. However, I believe there is another important piece of wealth that is not mathematically measurable, that is ‘Peace of Mind’.
If you own tremendous wealth (mathematically) but under constant stress or worry that your fortune will decline, if you can’t sleep well at night thinking about your stocks price fluctuation, are you wealthy? Going back to Peter and Jack, if Peter has a $10million dollar portfolio, but lives a stressful life, works long hours, doesn’t see his family often, and sleeps poorly; Jack only has a $1million dollar portfolio, but he works a few hours during the day, plays with his kids at night, eats well and sleep well. Who is wealthier?
财富 = 收入 – 开销 + “踏实的心”
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