We’ve all heard people talk about wealth and how to accumulate it, but it can sometimes seem pretty complicated. Here is a simple formula that I show all my clients which is just the bare basics. The “Wealth Formula”, or the formula to creating ‘Wealth’, is:

MONEY
+ TIME
+/- RATE OF RETURN
– INFLATION
– TAXES                             

WEALTH

1. Money: In order to create wealth, you need to start off with your own money. Whether it be lump sum contributions or regular (monthly, weekly, bi-weekly etc..) contributions, we need to start somewhere.

2. Time: Time is a very important thing. A lot of people wait to start investing, which usually results in them not achieving their financial goals or not having enough money in retirement. Some excuses they use are “we’ll wait until the kids are out of the house” or “wait until my debt is paid down” or the like. Often people wait for the situation to be ‘just right’ before they start considering for their future needs, but the reality is, it rarely ever becomes a ‘perfect scenario’. You have to learn to ‘pay yourself’ – yes it’s cliché but it’s true. You need to give your money as much time to compound as possible, so that you can live the type of lifestyle you want to live. Accumulating wealth is not done over-night; it takes years, even decades, to do it. Even if it’s a small amount of $25/month, start somewhere and then gradually increase.

3. Rate of Return: There is always a rate of return that dictates how much return we get on our investments. You can either have a positive or negative return; obviously we all want a positive one. This kind of ties into point #2 of ‘time’ – the longer you are invested, the better chances you have of having a positive rate of return. This is because your money will have time to compound and go through the market cycles.

4. Inflation: This point is something that the vast majority of people overlook. Inflation pretty much erodes your purchasing power. In English: A dollar today is not worth a dollar tomorrow, as cost of living continues to increase – examples include Gas, Groceries, Clothing, Homes etc… When investing, you must make sure that you’re beating inflation, otherwise even though it might seem that you have a ‘positive’ return, you might actually be ‘losing money’.

** As a side note: We often hear the Bank of Canada talk about Inflation levels and what their ‘target’ inflation is. It would, however, be a little difficult for the government to back up their claims for the inflation numbers they give us (whether it’s 1.5% or 2.0% or whatever they tell us). The reality is, the numbers the Bank of Canada  uses when telling us about the current inflation rate, are not entirely accurate, as they strip out the prices of volatile goods/services such as food, gas and energy – let’s not forget the booming price of Real Estate in Canada either. As a general rule of thumb, using inflation numbers between 3.0% and 3.5% would give more of an accurate measurement as to the real purchasing power of your money.

5. Taxes: We all know that there are only 2 things that are certain when living in Canada – death and taxes. Taxes can take a HUGE chunk out of your investments, especially if the plan is not set up properly. Also, those in the higher income levels and tax brackets can have a higher percentage of their investments eroded by taxes – sometimes unnecessary taxes. Having an Elite Financial Advisor preparing a proper Financial Plan for your portfolio can often mean having your taxes minimized, and in some cases, negated.

An Elite level Financial Advisor will carefully take a look at every point discussed here and put together a plan that works best at addressing the points. These days too many Institutions and Advisors are just focused on taking your money and don’t take the time to set up a proper financial foundation with their clients. Building a strong financial foundation will all you to both enrich your today, while securing your tomorrow.