Something as simple, and at the same time as complex, as this chart would show the principle of people’s wealth. If we measure life only in money, we are all born at the start of this chart. The grey shaded area is the money or wealth we accumulate. Clearly, there are only three ways to make the grey area bigger:
1. Increasing income.
2. Reducing expenses.
3. Increasing income and reducing expenses.
Don’t forget that, on the chart, the money we can earn is unlimited, but time is very limited. So in financial education, the time factor always works against us, even though compound interest (which needs time) works in our favour.
When we are very young, we have no expenses, but as time goes by, expenses will always increase, above all as we adapt to a certain standard of living or take on responsibilities.
Over time, if you focus only on cutting expenses without bothering to increase your income, sooner or later the grey area will end up getting smaller.
The secret of wealth does involve living as frugally and as debt-free as possible, but the truth is that we shouldn’t focus so much on expenses. We should put 90% of our attention on constantly increasing our income, diversifying our sources of income and building up as many assets as we can. (Read: different ways to make 1 million)
Investing, reinvesting and looking for new sources of income will make the angle of the grey area keep growing, without the need to focus so much on the red line.
The angle of the grey area shows a trend.
It’s no secret that the more money you have, the more likely you are to generate more money, just as the more debt you have, the more debt you will have. At a certain age, barring very sharp changes in mindset, if the angle of the grey area was shrinking, it is very likely to keep shrinking for the rest of the way. I insist: that is, if there is no change in mindset and we keep doing the same things that caused the downward trend in the first place. The same is true in reverse.
Further reading
- The 7 worst mistakes we make with our personal finances
- The worst money mistakes people make in each decade of their lives
- 8 ways to commit financial suicide
- The 4 most striking differences between how the rich think and how everyone else does
Featured image: Aaaatu, CC BY-SA 4.0, via Wikimedia Commons.
