Intro: Hi guys, its Giang from moolahwise.com and in today’s video, I wanted to share with you guys a simple formula to build wealth over time. Like the old adage that money doesn’t grow on trees. Additionally, if you want to build wealth there is a simple formula that you must follow to build wealth consistently and slowly over time.

Lets get into it.

Wealth formula: This is a simplified formula that I was taught awhile ago and I wanted to share it with you guys here. The wealth formula goes like this: Money plus Time plus / minus rates of return minus inflation minus taxes = wealth. I will explain each part of the formula in depth throughout this video.

Money: First lets talk about the first part of the formula which is Money. We all have heard the old adage that it takes money to make money and in our case for savings, it is no different. When I say it takes money what I mean is that the investment must come before the return. Meaning whatever vehicle you plan on saving money in then you must start as soon as possible because what I have learned when it comes to savings , the sooner you start saving the less you will have to save and the more you will have over time. The rule of money is simple to have more, either spend less, make more, or save more. 

A few good rule to follow around saving money is to pay yourself first. Treat your “saving bill” as the bill you pay first because your financial future is more important then any other necessity that you can be spending on currently, don’t you agree?

Second rule is only to buy what you need. Learn the difference between something that you absolutely need versus something that you want. When I buy something new, I always ask myself do I really need this? Then my second question to myself is how often will I use this? That question will help me determine my cost per use. This is how much it will cost me per use of this item. Meaning the more I use something the cost per use will go down.  So for instance if I am debating if I should buy a new pair of shoes and the new pair of shoes will cost $200 but I will wear it everyday to work then how much will my cost per use be? Lets do some math $200 / 20 (working days in a month ) = $10 / day for the cost of use. Then just ask yourself is the $10/ month worth it for you to own the new shoes?! I know these rules won’t stop all of your unnecessary purchases but it will slow your purchasing urge down. As you can see the more you use the item , the cheaper the cost per use will be. 

Spending is a habit and so is saving, What if you could make a small change to your spending habit where you can start saving say $10 / day. That would equate to $300 in a month. And if you put that $300 in an account that earns you  8% consistently you will have around ~ $447k in 30 years. Now if you were more disciplined and can save $20 / day. That would equate to $600 in a month. And if you put that $600 in an account that earns you 8% consistently you will have around ~$894K in 30 years. Imagine having an extra $894K in retirement to play and travel with and it is possible if you can save $20 / day.

But you are probably thinking that you are already living on such a tight budget that there is no way you can find $300 a month to save. Lets see how you can find an extra $300 a month. Maybe you can pack your own coffee and your own lunch everyday. Let say you decided to take me up on my own challenge and pack your own coffee and bring your own lunch everyday, will that help me find $300 in my monthly budget? Lets look at some numbers on how much bringing your own coffee and lunch can save you every month. So lets say you spend $3.50 at startbucks everyday for a cup of coffee. In one month you would save $70 a month (assuming a 20 working days in a month and you’re only getting one coffee per day)  or $840 per year. And keep in mind that I am using a conservative amount of $3.5 for a cup of coffee per day and I am only assuming 20 working days per month but if you get multiple cups of coffee everyday or work more then 20 days in a month then that amount you are saving can be much more. Additionally, if you spend more for each cup of coffee then the amount you can save is also much more, that is only for one cup of coffee per day. Now lets talk about how much we spend on lunches. Lets say you spend $10 / day for lunch in 20 working days in a month then you will be spending $200 / month or $2400 per year. Keep in mind that it is only spending $10 / day on lunches but if you are spending more per lunch then obviously you can save more money if you pack your own lunch. So lets total it up if you bring your own coffee and lunch you can save ~$300 a month.  ~ $70 + ~ $200 = $270. We all should be able to save that amount per month for our financial future, shouldn’t you agree? 

Time: The second part of the wealth formula is time. In the time portion of the formula we will be discussing (2) concepts that relates to time value your money. The first concept is to start saving earlier . The second concept when it comes to time and money is the rule of 72. Below I will explain each concept a little more in depth. We believe that one should get wealthy over time so the time value on our money is a important part of the wealth formula.

Time is money. The sooner you save the better for your future. Procrastination is the enemy of savings, when people are younger they think that they will have plenty of time to “start saving for retirement”. Lets illustrate this with two examples. Meet Mr. Start saving now and Mr. I am still young so I can save for retirement later. Mr. Start saving now saves $3600 per year for only 7 years in a 8% tax deferred account while Mr. I am still young so I can save for retirement later starts saving $3600 per year for 17 years in a 8% tax-deferred account starting 7 years after Mr. Start saving now. Who do you think will have more money at the end? As you can see that Mr. start saving now will save $3600 / year for 7 years totaling a total contribution of $25,200. Even if he stops saving at year # 8 he will have about $128,361 in 24 years. While his counterpart Mr. I am still young so I can save for retirement later saves the same amount per year as mr. Start saving now and in fact he will be contributing more and for much longer then Mr. Start saving now to end up with about the same amount of money. As you can see Mr. I still young so I can save for retirement later total’s contribution is $61,200 to end up with $131,221 about the same amount as Mr. Start saving now. So what is the moral of this story? Start saving as soon as possible because you will have more and paid less then someone that started after you. Keep in mind that this is only a hypothetical example to illustrate how saving sooner can affect your financial future.

Rate of return: The next portion of the wealth formula is what we call rates of return. As you will notice that in the wealth formula it is plus or minus rates of return. How can that be? I thought rates of return was supposed to grow my money and not minus my money right? Yes the rate of return is positive only if where the money you are saving is growing consistently , think CASH Value life insurance. While, if your money is in a variable account, your rates of return can be positive or negative, think stocks / mutual fund or cryptocurrency. In this portion of the formula use the rule of 72 to calculate how long it will take you to double your money. Below is an example of what it will take to double your money given a rate of return.

Keep in mind the following regarding rule of 72. The rates of return must be consistent for the rule to work. Meaning if one year you get 10% and then the next year you get -5% rate of return then the rule of 72 won’t be applicable. And also the rule of 72 is to calculate compound interest. If you are getting a simple interest then the rule of 72 wont work either.

Another thing to remember is that rule of 72 can work against you too. Think credit cards and inflation because those things compound against your wealth too. Watch my video about the rule of 72 for a more in-depth explanation of this concept. So what is the moral of the story? You are either paying interest or collecting interest. So be sure that you are collecting the interest and not paying it! 

The next concept I want to talk about regarding rates of return is what the real rate of return is. When you save or invest, it is important to have a good rate of return but understand what is the real rate of return is more important then the actual rates of return. When I say real rate of returns, what I am talking about is what you will have after subtracting the fees , inflation and taxes. 

Below are two simplified examples of the real rates of return and how it can affect your savings. As you can see in example #1: if you saved $100 and gained 3% interest and have to pay a tax of 25% then you really have only $102.25 after taxes and if you subtract inflation off then you are really only left with $98.75.  In example #2: If you saved $100 and gained 5% interest and have to pay a tax of 25% you will have $103.75 and after subtracting inflation at 3.5% then you are left with $100.25. So what is the point? The point is that your money has to earn at least 5% to outpace the inflation and taxes. Would you rather get a higher rate of return but have to pay taxes on it , or would you rather have a slightly lower rate of return but get to keep more of it? Keep in mind that this is only a simplified illustration of what is the real rate of return assuming a 25% tax rate and a 3.5% inflation rate.

Inflation: The next portion of the wealth formula is what we call inflation also known as the silent tax. Inflation is the rise in prices of goods and services over time. Said differently it means the buying power on your money goes down over time. Usually inflation is around ~3%. So for instance if you had $100 and the inflation was hovering around 3% then a year from today you would still have your $100, but the buying power of that $100 is more like $97.  However, during the last couple years the government printed all this money for stimulus checks for covid then the inflation can be higher. Right now the inflation is around ~ 9%. Below is a image of how much inflation eats away of your money. As you can see $20 in 1988 can buy you a full grocery cart of groceries. Now that same $20 can only buy you ¾ full of groceries and then that same $20 dollar can only buy you less then ¼ full of groceries. So what is the point? Wherever you put your money make sure that it is at least outpacing inflation.

Taxes: The final portion of the wealth formula is taxes. Do you think the taxes will be lower, the same, or higher in retirement? When you make money they tax you. When you buy something they tax you. When you die they will tax you. So how do we neutralize our taxes? We neutralize the tax liability by putting our money in more tax efficient accounts. I am just going to remind everyone what the (3) buckets of taxes are and you can watch my other video for a more in-depth explanation of the (3) buckets of taxes explained. Just to remind everyone the first bucket is called the tax now. And these are some of the most popular tax now accounts. The next bucket is Tax later and these are some of the most popular tax later accounts. The last bucket is called the tax advantaged or also known as tax free or also known as tax never and these are some of the most popular accounts in the tax advantage bucket. The last thing I want to share with you is the historical tax rate of the USA. As you can see in the year 1944 the federal income tax rates were about 94%. So imagine making a million in 1944 and only being able to keep $60,000 out of $1,000,000. So what is the point of showing this? That the tax rate can go up at any time and if it does goes up then it brings up all the tax brackets and not just the top brackets. Additionally, since historically it has been at those rates, what is stopping uncle sam from making the taxes that high in the future?

Conclusion: So what did we learn in today’s video? I am reshowing the wealth formula just to reiterate the wealth formula again. We have to start with money then add in how much time we have to grow that money, then add or subtract on the real rate of return (net of fees and taxes) ,minus inflation, minus taxes over time will give us wealth. We learned that we must be earning at least 5% on our money to neutralize the taxes and inflation on our money. Let me ask you, are you earning at least 5% (NET) on your money currently? Understand that you can build a successful financial future if you have a plan and work that plan! It is our responsibility to be wise with our money because if we aren’t then no one else will be looking out for our money.

We have a mission of educating 1 million families on how money works and we can’t get there without your help. You can help us achieve that goal by liking our content on our youtube channel because it will help with the algorithm. If you have any questions about money please reach out to me at (415)385-9116 or email me at [email protected]. Thanks for listening. Bye for now.