The Arithmetic Of Wealth

Understanding the arithmetic of wealth is critical to acquiring wealth. It is your passport to wealth. Arguably, knowing this topic is more important than knowledge about markets!

This knowledge makes it easy to draw your path to wealth. It is motivational in the sense that what seems beyond your reach is seen as understandable and attainable. Before my kids went off to college they were introduced to this powerful topic.

Albert Einstein Agrees

The arithmetic of wealth refers to the compounding of money. Albert Einstein was so enamored by compounding that he referred to it as ” the eighth wonder of the world” and “the most powerful force in the universe.” High praise, especially considering the source.

This topic is so important that even if you believe you understand it, reviewing it is strongly encouraged. 

Income Helps, But ….

Becoming a millionaire is not necessarily related to the income you earn. Innumerable stories can be found about janitors or low-skilled laborers who toiled their entire lives in obscurity. Upon death, these unimportant and unheralded people were discovered to be millionaires or multi-millionaires.

The first one who came up on a Google search — Ronald Read, a janitor and gas station attendant never earned much money but died with an estate of $8 million. His story is not that unusual. Here are similar stories.

What is common in these cases is a willingness and discipline to save and invest.  No “keeping up with the Joneses” or pretending you are wealthier than you are. Little if anything is purchased with debt. Lifestyles are sparse. Yet these “nobodies” end up better off than many corporate types who consistently live beyond their means.

These people do not acquire wealth because they have unusual stock market expertise. They do it with regular savings properly invested. These surprise millionaires are not Warren Buffets, nor do they have unusual stock expertise or access to inside information. They are “average Joes” who do something which today is considered extraordinary — they live within their means and create a nest egg to protect against the unexpected. 

High income is no guarantee for wealth creation. You still need prudent habits and behavior. Ostentatious spending reflects personal insecurity and also can offset the advantages of high income, at least for wealth building. If there is one characteristic that tends to identify the “surprise millionaires,” it is humility and self-confidence. The self-assured end up with wealth beyond what their incomes and lifestyles would suggest. They live within or below their means.

The immature and insecure spend what they make (and oftentimes more) to impress and, temporarily, outshine their peers. Whatever produces this insecurity is irrelevant but it always yields a retirement less comfortable than earnings would suggest.

Luck Helps, But ….

Becoming a millionaire does not require luck. Nor does it depend upon an uncanny ability to pick stocks.

Those lucky enough to be in on the ground floor of Microsoft or Apple became millionaires merely by holding the stock. But, depending on wealth creation this way is like counting on winning the lottery to fund your retirement.

For every lottery winner, there are millions of losers. For every start-up company that makes it big, there are thousands (perhaps millions) that you never hear about because they fail.

Playing the lottery is not a way to wealth. Nor is playing the stock market as if it were a lottery.

The Arithmetic of Wealth

The arithmetic of wealth shows the magnifying effects of savings, particular savings done early in one’s career.  The arithmetic of wealth reduces its creation to simple mathematics understandable to virtually all. Knowing how simple the mechanics of wealth creation are makes it possible for many who never thought they could become rich to aspire to such a goal. Learning these simple techniques is motivational.

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