Fantastic thread
@biophase thanks for starting it.
I created a formula for wealth that kind of describes what (in my experience and to me) wealth is all about. I think it breaks down to several elements that all added up make for a great life. We need a way to remove financial stress, enjoy freedom at our current level then enjoy the rest of our lives either enjoying or building those reserves or income streams. We need financial relief now and financial security for the future. These are two separate needs though often mixed into one goal and I believe this is where the dissonance comes in.
I think if we were to examine the path to wealth in order to find the fastest way to get there it would be sensible to start with a definition. I personally don't believe wealth is measured accurately by how much money you have but more relevantly by how far you are from financial stress. I start at financial stress because that's where our current pain is coming from and given that everyone's current financial pain is different from everyone's else we need to remove the number and replace it with a variable. I use "X".
So, let's say that X represents your current financial stress - your bills, payments and current expenses. When explaining this I start with $1,000 a week because the number is easy to work with and most people I've spoken to who are currently living low income or lower middle class lives agree that they could pay their current bills for $1,000 a week or if that's too much could upgrade to live a pretty decent normal middle class life for $1,000 a week. So $1,000 a week would equal "X".
This is just a starting point of course. Being able to pay your bills is not a wealthy life but if you could make $1,000 a week at least you'd be able to pay your bills and for another week financial stress is minimised but you probably would still have debt burdens and the worry of needing to do it all again next week so that's the start of your financial concerns taken care of for this week but what if you could earn that $1,000 in an easier way than having to trudge off to work every day? So the first wealth goal (in my way of thinking) would be to try to eliminate the horrible job from my life and try to make the money (and time) I need in a more "free" or at least more enjoyable way. So, if I could "earn a living" from home - even if my income remains the same and covers all my current bills - I'd have taken a big step towards freedom and wealth.
Obviously we need more than our expenses to live a wealthy life though so our next step/goal/aim is to increase that income and start to build cash reserves and net worth but here's what happens to a lot of people; as soon as they earn more money they start to live a better life by surrounding themselves with better housing, transportation, luxuries...etc and that's all cool and great fun but the problem is that now with the greater rent and payments they're financial stress levels have increased so they find themselves feeling "not much better". I think this is because they "drag" their stress along with them every time they make more money. This is why making more money doesn't always make people feel better. The "trick" to feeling wealthy is having more money than you need. How much you need to feel wealthy is debatable but your current essential financial expenses are not. They're an exact and measurable amount.
So how much does someone need to "feel" wealthy? In my experience and by running it past many people an easy number to remember is double. Twice your essential expenses in income is all you need to feel wealthy. Obviously it doesn't have to be a hard number like twice/double but what happens at about that level is the law of diminishing returns kicks in. Once you get far enough away from a danger (or stress) the danger diminishes to the point where any further distance doesn't feel much better.
So now, a good next goal would be to make twice your essential income or "2X" or ($2,000 a week). If you could get to a passive or enjoyable $2,000 a week but maintain only $1,000 a week in essential expenses you'd have another $1,000 a week to spend on fun and luxury and would be living a pretty good life. A much better life than nearly everyone on earth but of course that's just stage one for folks like us but here's the best part. Now you have $1,000 a week to do with whatever you like without it affecting your ability to maintain your current living arrangements. it's spare money. You can save it, blow it, invest it, give it, spend it, pay off debts with it...do anything you like because it's "spare".
Then, from that point you'd have the time and spare cash to start thinking of bigger and better things to do and eventually (if it's what we want to do) build large businesses that bring loads of great value and make us lots of fantastic spare money. So, wealth comes early but growth is forever. This is why this is such a great thread.
@biophase makes the point that the journey is the best bit and so it is but it's even better if you "feel" wealthy as soon as possible and that won't come from achieving some magical popular number of dollars. Wealth needs a far more specific definition so we can all get to it as soon as possible and then we can grow from there to become whatever we need to be. The danger comes when people who are wealthy (using my definition) but don't know it or feel it because they're not "millionaires".
Don't misunderstand, I want to become a permanent "ultra-millionaire" just as much as anyone else and the more money we all have the more we can help other people around us. I have zero problem with making or wanting to make millions as fast as possible - the faster the better but given the formula I use to determine "wealth" or more accurately "financial freedom" at $2,000 a week or $100k per year is a lot easier to obtain and maintain than having a one-eyed goal of "millionaire" before even considering yourself wealthy. It happens much earlier than that. Not that finding a way to double your income is an easy thing - especially passively but as soon as you get there (presuming you know you've arrived) the rest of your wealth journey will be a fantastic ride and it'll never matter where you end up or how much money you have or end up having. Get wealthy ASAP then enjoy your growth.
I even came up with a simple wealth formula.
2X=F/H+P
Where:
X = Essential Expenses
F = Financial Freedom
H = Hobbies
P = Passions
So if you have at least twice as much income as you need for essential expenses you will feel financially free enough to enjoy your hobbies and pursue your passions be they personal or business growth. I call it "The 2X Method".
Now, most of us in here are pretty eager beavers and will probably grow pretty fast so what happens if one week you make $3,000? Personally, I'd spend $1,000 on essential expenses, spend as much as I needed of the next $1,000 on fun and luxuries and bank the rest. I like to bank excess cash so I can build a buffer for real emergencies (a bargain is not an emergency) and to eventually build up enough cash reserves in the bank to be able to live at "2X just on interest alone. Then, as I grow more (if that's what ends up happening) I'll just keep building my cash reserves and always living at "2X".
For example, let's say I make $10 million and decide to bank it at 5%. Super safe regular and dependable income of $10,000 a week (roughly and gross of course) and no financial stress. If I did manage to achieve $10,000 a week using the 2X formula I'd be able to comfortably spend $5,000 a week on essential expenses as well as another $5,000 a week for fun and luxuries. How awesome a life would that be?! But let's say you lose half in tax - fine, now I have $5,000 a week which I split into half and always at all times keep my essential expenses (which bring us all that financial stress we all hate so much) and I'd still have $2,500 for expenses and $2,500 a week for fun and luxury.
What about debt? I believe it's not the debt that stresses us out so much as the payments. Yeah, it's a grown having a debt but if you want to pay it off you can do it with your extra cash as doing that will be both fun and a luxury. So, no matter how much you make, if you spend more than half your income on essential expenses you'll always feel financial stress. Conversely, even if you don't make much, as long as you can try to keep your essential expenses down to half your income you'll always feel "kind of wealthy" - especially if you can do it passively. I know this for a fact because I've lived my life like this for the last 5 years knowingly and probably another 5 years before that without fully appreciating it.
I explained this to my butcher some months ago and he was stunned to realise that he was already wealthy because he was making about 3X. I draw that little formula out on the butcher's paper right there in the shop and he was stunned. It's a simple way to get wealthy fast while allowing for and encouraging growth while having fun and enjoying a little luxury along the way.
So it's not the journey to wealth that's the best part. It's the journey of growth while maintaining wealth that's the really fun part. Achieve relative wealth first then use that power to propel yourself to anywhere you want to go and if you use the "2X method" you'll always be wealthy no matter how much money you make. Oh, and here's the best part about that little stash of income generating bank deposits...if you build the right financial structure you can put that money into a trust, you're the main beneficiary while alive and receive the (for example) $2,000 a week but if you die the trust deed directs the income to the next listed beneficiary i.e. your kids, then their kids...etc. You do the big work once, set up the "family income" and become the financial hero for generations to come.
So while "wealthy" may come earlier than expected by using my 2X formula, there is still much work and growth to be done. You want to make sure you leave enough so that inflation makes it last at least a few generations. So in a way we can eat our cake (achieve rapid wealth) and have it to (build massive wealth as a legacy for others). All we have to do is shift our focus a little and accept a few new definitions.
