Wealth: Most influential factors

Understanding the factors that influence wealth as well as the relative importance of these factors is central to building a wealthy life. This knowledge will allow you to focus your efforts in the right areas, thereby building wealth at a very rapid rate.

Even though many people might not like it, the primary influence on the wealth of those earning standard salaries is daily living expenditures. If you keep on spending more than you earn (like virtually the entire Western world has been doing for the past two or three decades) you will never be wealthy. The graph below clearly illustrates why the developed world is going bankrupt.

When using the definition of wealth advocated in the One in a Billion project; financial resilience, expenditures become even more important. Just as a reminder, financial resilience is the number of years that your accumulated financial wealth can sustain your current lifestyle if your income were to be completely cut off today. Therefore, if someone has financial wealth of $100,000 and yearly living expenses of $50,000, he has 2 years of financial resilience.

Now the nice thing about modest living expenses is that it improves financial resilience both by increasing the amounts you save and by allowing your accumulated wealth to last longer. For example, if the person in the above example were to reduce his yearly living expenses from $50,000 to $25,000, his financial resilience would instantly double from 2 to 4 years.

And yes, just one more time: massive consumption does not increase happiness (below) and actually reduces lifespan through unhealthy consumption habits. The epitome of western consumerism, the USA, has a pretty woeful life expectancy for a developed nation even though they have by far the greatest healthcare expenditures. And yes, they are also now officially raising the first generation of children that will live shorter lives than their parents.

The second most important constituent of wealth is your investment strategy. We will speak a lot about investment later on, but smart investment of money and time can bring great wealth and also mean a lot to our environment, economy and society. As an illustration, it can be calculated that a retirement-age American who invested about 15% of the median income in the stock market over the past four decades would be a millionaire by now.

Finally, the third most influential factor on wealth is your income. Those who want to achieve financial power will have to earn an extraordinarily high income by rendering a very valuable service to society, but the vast majority of us who earn average salaries can easily achieve financial security and freedom by keeping our expenditures in check and investing wisely.

In the end, the secret to lasting wealth is only 10 words long: spend less than you earn and save/invest the difference. It really is pretty embarrassing that so few people do this.

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