The easiest way to increase your wealth is by saving part of your income. Most people think that wealth creation requires some special magical formula which is beyond their imagination. So they do not even set specific financial goals with action plans to meet their needs.
Wealth creation requires hard work but it is important to understand a simple wealth creation equation, which is the relationship of your expenses to incomes. This article discusses the influence of our spending on the wealth creation goal.
Assuming you have no asset and you have just received your first salary of $1,000, then your wealth will jumped from zero to $1,000. If you spend $750 and deposit $250 into a saving account, your wealth is now $250. This mean 25% of your salary is saved for the future. Of course some people with the same salary would have saved $400, $50 or even nothing.
The formula is simple, the more you save, the more you create wealth. However, earning levels are different, some people earns five digits in a year whiles others earn six or seven digits.
In other to show the relationship between saving and wealth, let group people into four categories base on their income and expense level:
1. High Income and Low Expenses
These peoples save large chunk of their income. Their net worth keeps on growing year after year due to their higher saving. They keep their expenses under control. They usually have good investments portfolio. Imagine of John earning D40,000 per month and he also saves D10,000 per month. If he continue saving the same amount for 5 years, his savings account will be D600,000 without considering the earned interest.
Tip: Continue saving more money and keep on building wealth but never abandon your basic needs. I am sure you are building the wealth for a purpose. Also give your time and money to causes that better our society and world.
2. High Income and High Expenses:
These people earns higher income but they also spend a lot. They usually spend on food away from home, travel, housing and entertainments. An increase in this group is a positive development for most industry. They are also not good at wealth building. An example say Doyin earns D40,000 per month but she spend at least D39,000 in a month. In 5 years, her savings should be D60,000 again without interest.
If you check this group, their net worth’s are usually very low or sometimes negative, because they sometimes even spend more than their income. They have potential to create wealth and most times when you meet them, you will think they have the wealth.
Tip: Control your cost and be yourself. You need to set financial goal and start working on them.
3. Low Income and Low Expenses
These are the low income earners but also manages to stay within their income. They almost spend all their income on necessity such as food, clothing, shelter and health. They have little or no surplus to grow their wealth.
Tip: Your best option is to look for additional source of income such as weekend job, small business. Invest in education for better job or business growth.
4. Low Income and Higher Expenses
The worst are the people who spend more than their income. They either have red bank balance or with large credit card balances and loans. They could be earning D5,000 a month and be spending D8,000. The fact is they keep on losing wealth, simply they can’t control their expenses. If you do a background check on them, in most cases, they try to keep up with their co-workers, neighbors, or peers spending patterns. I called them self pretenders, because they are simply living beyond their means.
Tip: Identify your needs from wants and control your cost. Be prepare to change and know that the better your stay within your means the better for your financial and emotional “Wahalas”.
The question we should ask ourselves is where do want to be? Category 1 or 4. No matter where you find yourself in the above quadrants, you have two choices to improve your financial health:
- Increase your sources of income
- Control your expenses and save more.
A fact: People who do not save any percentage of their earnings always have excuses.
At your best, rather than looking for one thousand reasons why you cannot save, you should look for one reason why should start saving from today. Whiles saving, do not forget about investing the funds.