What is Wealth?
To achieve wealth, it’s important to understand its definition. Although income from your job, however large the sum, is important to achieving your goals for wealth, it is not wealth. Wealth is defined as the part of your net worth, including assets minus liabilities, which generates income, dividends, and capital gains. Regardless of what you earn, the key to increasing your net worth or becoming wealthy is to spend less than what you earn. Many people misunderstand the wealth/income relationship, which explains why it’s possible to earn large sums and go bankrupt or earn modest sums and become a multimillionaire.
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One way to measure wealth is to calculate the length of time you could maintain your standard of living without an additional paycheck. In other words, if you stopped working today, how long could you continue paying for your mortgage or rent, utilities, groceries, and activities without a paycheck from your job? If you can sustain your current standard of living without a job for decades, then you’re clearly wealthy! Although most people don’t amass the kind of wealth that allows for decades of life without a job, it is possible to create wealth that allows for a comfortable standard of living in retirement.
Advantages to Achieving Wealth
Advantages of being wealthy have more to do with the freedom of choice rather than what you own.
Three significant advantages of being wealthy are:
- Generating cash without working directly for it (i.e., income from investments in businesses such as real estate, car washes, and parking garages as well as mutual funds, stocks, and bonds)
- Maintaining your lifestyle without concerns about job loss or disability
- Retiring when you’d like to retire versus when your net worth allows for it
Although accruing wealth takes time, there are things you can do each day and from the time you start your first job to build your wealth, including:
- Spending less than what you earn
- Routinely saving money
- Investing in brokerage and tax-deferred or tax-free retirement accounts,
such as a 401(k) or Roth IRA
- Ensuring that you compound the interest, dividends, and capital gains your money earns
Why Saving and Investing Money Matters
Successful investments have the potential to change your life. But to invest, you must save extra cash.
If you’re not convinced that saving your money for investing it is the way to go, consider that earning a 10% return on $10,000 will net $1,000 before taxes, but a 10% return on $1,000,000 yields $100,000. If you invest 10% of your 100,000 salary at an average rate of return of 10% for 30 years, you would have $1.7 million dollars. If you use the same figures and calculate them over 40 years, your total would be $4.6 million dollars. These figures represent an example of the importance of building your wealth when you’re young—even with income from your first job. One of the best ways to invest to yield large sums down the road is to fully fund your tax-deferred or tax-free retirement accounts.
Popular Community Bank Can Help
Whatever your financial goals, Popular Community Bank can help get you started toward reaching them. Our financial counselors would be happy to discuss products and practices designed to build your wealth.
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and building your wealth today!
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The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person’s situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Banco Popular North America does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.