Understanding the Wealth Formula
Understand how inflation and taxes can reduce your wealth
Wealth can be achieved by using a simple formula that involves:
- Earning money
- Saving a portion of that money for the future
- Investing the money you save so that it grows over time
To determine your wealth, you need to take into account:
- The amount of time you save and invest your money
- The interest or growth rate you can expect from your investments
- The taxes you pay on your investments and income
- The inflation rate, which reduces the purchasing power of your money over time
By managing your income, savings, and investments, and taking into account the impact of time, interest, taxes, and inflation, you can create a plan to achieve financial success and build wealth over the long-term.
What are the affects of each?
Time-The more time you have the more choices that are available to you for investment. You may be able to recover from losses if you take higher risks. But as you get older you cannot always afford to lose because you won’t have time to recover.
Rate of Return (Interest) – If your money is in an account that is outpacing inflation and not suffering losses, you will positively affect your wealth. If you are getting a low rate of return your money’s value is shrinking. If you have your money in accounts that may suffer losses it could take months or even years to recover.
Inflation-The higher the rate of inflation the less your money can buy. When the cost of goods is low your money can buy more. When the cost of goods is high, your money buys less. It is all about supply and demand.
Taxes-There are three tax strategies that you can use to invest. Tax-now strategy is taxed each year on gains that are earned. These are investments like stocks and bonds. Then there is the tax later strategy. These are investments that are tax-deferred like 401k retirement accounts and pensions. The last is tax-advantaged strategies. These would be investments like Roth IRAs and cash-value life insurance. Each has its own pros and cons.
Do you want to find out how your finances are being affected by these factors? Click on the link below to get started.
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