How To Play The Money Game
You ever watch a game and see people get so worked up and excited and you have no clue why?
They understand what’s going on and the rules of the game. That’s the primary difference. When you understand the rules you can either cheer when your team is winning or performs a remarkable play; or you can be on the opposite side yelling at the referee and telling them how to manage the game.
Rules help create a level playing field for everyone to abide by to make the game as fair as possible. When you don’t fully understand the rules and decide to play a game, it’s highly probable that you may lose if you’re playing with experienced players. In case you didn’t know, there are rules to this game called money. Many people walk around upset, in debt, stressing and blaming others for their financial shortcomings, when in fact, they just didn’t receive the rule handbook to money.
Now, this rule book is massive, but today you’ll learn the basic foundational principle - The Wealth Formula. Understanding and implementing this formula will help you to build and grow your money each and every day.
The Wealth Formula is:
Money
+ Time
+/- Rate of Return
- Tax
- Inflation
= Wealth
Money
Earning money is simple. The challenge is what to do with it after earning it. The old adage goes, “it takes money to make money” and according to this formula and rule it does. You work hard for your money, let’s now employ your money to work for you.
Time
Time is the most precious commodity we have today. Lack of time management may lead to frustration, lack of sleep, stress and many other things. How do you manage time with respect to your finances? When you don’t save for the future and only live for today, you allow the income growth of your money to be hindered. When you save money in some form of account that’s willing to pay you interest, the longer you have it in there, the longer you enable your money to be an employee for you. The less hours you put your money to work, the less you get paid. Send your money to work for you. Today is never too late to start.
Rate of Return
When you decide to invest money there are 2 guarantees. Guarantee 1, the market will go up and Guarantee 2, the market will go down. This determines the rate of return on your investments. How do you use this to your advantage? Since there will always be fluctuation in the market, systematic investing (or Dollar Cost Averaging) is one of the best ways to invest that allows your money to grow and minimizes your loses. Dollar Cost Averaging is consistently saving the same amount every month, regardless of what the market is doing. Warren buffet has 2 rules to investing. Rule 1, don’t lose money and Rule 2, don’t forget rule number 1. The earlier you start to invest, the greater potential for your money to ride the waves of the market so that you can earn more over time.
Tax
Taxes have the greatest impact on our finances. Practically everything we do with our money is impacted by taxes; purchases we make, money we receive, money we save and even when we pass away we are taxed. That being said, you must take the time to understand the tax implications of the accounts you are using to build your money (ie. TFSAs, RRSPs, RESPs, 401Ks, LIRAs, etc.). Leveraging and adding as many tax exempt or tax advantage strategies to your portfolio will allow you to save more and build more wealth.
Inflation
The secret killer. Inflation is always on the rise year after year and sometimes grows faster than your income or savings. The main objective here is to ensure the Rate of Return (mentioned above) on your savings and investments is higher than the rate of inflation. If it’s not, you are losing money as illustrated in the wealth formula. For more information on how inflation works, check out our recent blog post: Inflation… What’s that?
Now you are equipped with the foundational rule to this game of money. Take a look at your current savings and investments and see what areas within the Wealth Formula you need to work on or adjust to build greater wealth. And whenever you are ready to learn more ‘money rules’ and create the financial life you truly want, just reach out! You can find all the details of how we can journey together, right here.