There is an iron formula of wealth that can be applied to all financial plans. The relationships between balance sheets cannot be broken in any way.
To become wealthy, you much increase the net worth on the bottom of the balance sheet. The only two ways to increase net worth are to increase assets or reduce liabilities. You need surplus cash flow to do either of these things. Surplus cash flow is driven by the cash flow statement.
The iron relationship of the cash flow statement is that Inflows – Outflows = Surplus (or Deficit) Surplus, wisely invested, leads to wealth.
This is an iron relationship and every financial concept fits in to this formula. Everything.
Once you understand this relationship and optimize it you gain the ability to understand what you can do in your situation.
You have three levers to press to build wealth:
- Adjust the size (and characteristics) of your inflows.
- Adjust the size (and characteristics) of your outflows.
- Adjust the rate of return (size) and characteristics of your investments. (and it could be argued that this is actually part of #1, because this would affect your inflows)
There is nothing else you can adjust and all three of these are important. However, there are myriad ways in which you can personally adjust each of them for yourself.
In today’s show we talk about ways to optimize and adjust these variables and how you can develop a customized plan to apply to your situation.
Enjoy the show!