The Wealth Equation (1 of 3)

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The wealth equation part 1 : Income

Is it possible to boil the secret of wealth down to a simple formula? I think it is not only possible, it is necessary. It is so easy to over-think wealth. Our relationship with money is extremely complex. We unwittingly give it different meaning and power way beyond its value. There is no other ‘concept’, with the exception perhaps of religion, that can stir up so much passion in a person that they are willing to kill for it.

We all know of people who will throw every single value they have ever held out of the window  in the pursuit of the almighty buck. To be more exact, in pursuit of more income. But that is wealth isn’t it? Nope. Wealth is what is left after you have consumed your income. Even an ecosystem can be boiled down to some very basic elements so that they can be understood better. Inputs minus outputs equals growth. In an ecosystem the Inputs are numerous; sun, water, elements, oxygen, carbon dioxide, soil, food. Outputs include energy, pests, elements, oxygen, carbon dioxide, harvest, offspring and consumption – to name a few. The growth is the increase, of the plant, the animal, the population. If the outgoing is more than the incoming there is no growth. For dinosaurs (and millions of other species) they become extinct.
The equation is simple. Income minus consumption equals wealth. That means there are 3 components of your financial life you can tweak to grow your wealth. You can increase your income, decrease your consumption and manage your wealth.

Just as inputs in nature come from multiple sources, so too in a wealth ecosystem. Traditionally we look at active or passive income, but at the end of the day passive income doesn’t just happen – it usually requires a capital investment (for dividends or rental income) or an investment of your time (for royalties, sales, ongoing commission etc).

We humans are the only beings on earth that have to work to live – or mooch off others who work. Even that is changing, domesticated animals have to ‘work’ to live too. Wild animals have to provide us with ‘entertainment’ to pay for their reserves. What about protected forests? We pay them for producing the oxygen that we need just to survive, let alone thrive. That is a concept that is slow in coming, but without it we too will become extinct.
Without getting into the whole ‘money doesn’t buy happiness’ philosophy, I think everyone has a bare minimum standard of living they want for themselves, and their family, and that takes money. Sure, you can live hand to mouth and ‘off the grid’ during your earning years, but what about after that? Land is never free, it belongs to someone – with the exception of the Antarctic – and my guess is that it would be pretty hard to live a scavenging, sorry foraging,  lifestyle down there. It is impossible to live without any money unless it is at someone else’s largesse, even if that someone else is the government.

 
So, get over the uncomfortable reality that money is necessary, and focus on what you can do to balance your equation without compromising your values. If hard work alone made you wealthy, billions of subsistence farmers the world over would be driving Ferraris. You need to leverage your skills, whatever they are, and trade those skills for income. Those skills can be unearthed, developed from scratch and honed to a razor edge. Even if you’re lucky enough to have god given skills, say as an athlete, you’re never going to be able to translate those skills into income without hard work.

 
Technology has made the acquisition of world class skills easier and cheaper than any time in the past. Mobile technology like produce trading apps and Mpesa are transforming the lives of small farmers all over Africa .They get that it isn’t cool to be clueless. Not only is it not cool to be clueless, it is downright dangerous to your long term wealth.

 
There is a quiet revolution going on in ‘education’ or ‘skills transfer’. The quality of that education is not depend on the buildings or grounds you sit in, it depends on who is transferring those skills. Here’s a thought – if you want to learn Maths properly, why not learn it from the best teacher in the world? With technology, that is becoming a reality. The teachers and lecturers of today will become the tutors and facilitators of tomorrow. I can already hear your eyes rolling into the back of your head at thought of you, your kids or grandkids are being exposed to even more technology. Think about it. You can either identify, train and pay hundreds of thousands of new Maths and Science teachers (who have been poorly taught in the first place) and deploy them out there in country and pay them a decent wage (which would take at least a decade). Or… you can leapfrog all that, identify the best teachers who have the knack of explaining a complicated topic, and get them to teach first the teachers (to be facilitators) and then teach everyone else.

I have seen the power of a powerful teacher work over and over in my life. I had a Maths teacher who got me from zero to hero in weeks! I kid you not, I was about to drop the subject and two years later I was writing the Maths Olympiad. Even once you are out of school, continuous learning is a fact of life. If you’re too lazy to keep yourself relevant in the market place, life is going to be hard. You’re going to be top of the retrenchment list and bottom of the promotion list if you work for someone else, and if you work for yourself, your product is going to become obsolete quickly. There are thousands of careers out there that weren’t even invented when you left school. Many careers that have been around for a hundred years or more are slowly becoming obsolete – is yours one of them?

Action: This is part one of a 3 part blog (with consumption and wealth still coming) and each component will affect your wealth. You can choose to ignore income and focus on the others, but if you want to multiply the effect, tweak all three. How can you increase your income? Are you going to invest time or money to produce more income? Are you going to be smart and use tools already out there and available free or nearly free or be tied to the old classroom philosophy?

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Author Dawn Ridler ©

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