The Ridiculously Simple Formula for Building Enormous Financial Wealth
A powerful financial lesson in 3 minutes or less.
Photo by Mathieu Stern on Unsplash
In Ernest Hemingway’s 1926 novel, The Sun Also Rises, a few of protagonist Jake Barnes’s expatriate friends arrive in Pamplona, Spain, and meet for a drink.
During the conversation, Mike Campbell, a Scotsman, discloses his recent bankruptcy.
“How did you go bankrupt?” American Bill Gorton asks him.
“Two ways,” Campbell replies.
“Gradually and then suddenly”.
Many of our financial missteps are not immediately devastating.
No one wakes up in the morning thinking, “this is the day I ruin my life.”
Rather it is the slow accumulation of poor decisions over time that can build into a tornado, which builds gradually and then suddenly becomes violent, that devastates your financial health.
The same logic can be applied to your physical health, relationships, education, or personal growth.
One meal won’t cause a heart attack, but a lifetime of poor eating and lack of exercise will. One decision to miss a family dinner won’t impact much, but years of neglect will destroy any meaningful relationship.
The problem with a lifetime of small but poor financial decisions is that they are hard to forecast the impact and even more difficult to undo.
In short, small decisions, compounded over a long period of time, can produce extraordinary results. Both good and bad.
This is actually great news.
Why?
Because you can build wealth by starting with small actions.
Building wealth relies more on your financial trajectory than your current financial position.
Remember that the process of creating and destroying wealth happens at the same pace: gradually, then suddenly.
If you’re trending in the right direction, time is your friend. If you’re trending in the wrong direction, time is your enemy.
Don’t get fixated on where you are now. Where you are now is the result of past decisions. You can make new choices and behaviors today to change where you are tomorrow.
Focus your energy on making sure you’re going in the right direction. The destination will take care of itself.
If you’re going to spend most of your waking hours trying to move up the financial ladder, just make sure the ladder is pointed in the right direction.
I’ve known well-off friends, noticed I didn’t say wealthy, pointed in the wrong financial trajectory, and in a decade or less will be poor.
My “rich” friends overspend, don’t track their financial health, and use their money to purchase more debt.
But I also know others who come from modest means and backgrounds yet will be wealthy because their financial trajectory is positive.
If your income and investments exceed your expenses, you are building wealth. How quickly you reach your financial goals depends on tweaking these variables.
Building wealth is formulaic.
The bigger the gap between income and expenses, and the more you can invest the difference into assets, the quicker your wealth will build.
Do this for long enough, and you will be wealthy.
What counts is where you’re going tomorrow, not where you are today.
If you can accumulate small 1% changes to your financial situation every day, you’ll be surprised where you can end up. Your decisions compound.
“In the short run, the investments you made doesn’t add up to much. In the medium run, it accelerates. In the long run, it explodes”.
— Daniel Pink
The formula for a positive financial trajectory
Make sure your income is larger than your expenses.
Slowly increase the gap between your income and expenses by cutting down on your cost of living and increasing your income.
Consistently invest the difference in assets rather than liabilities.
Be patient with your results and impatient with your actions.
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