Saving = Income – Expense
Networth = Asset – Liability
Accumulating networth is a process by which one controls the expenses and trickle down the savings into growable assets, while reducing liability.
Sounds simple? Yes, it’s easier said than done. But that’s how it always is. If you don’t get a lottery income, or don’t inherit a substantial asset base like most people, then accumulating networth is a fairly slow process most of the time. Definitely it requires lots of patience and fiscal disciplines.
Now let’s look at the two equations more closely. The first equation describes the fruits of your daily activities. By earning your income and controlling your expenses through budgeting, you can have savings. These savings are the very first step to your wealth. However small the savings may be, without it, one simply cannot get ahead financially.
In the second equation, it describes more of the passive side of money. The liability or debt should remain fixed or paid down. When acquiring new debt, you must have very good reasons, such as helping to increase your curent income or grow your asset faster. Unless there is an extraordinary reason, you should always pay down at least the interest on the debt so that it doesn’t increase as time goes on.
The Asset term in the second equation is the most tricky and difficult one to handle among the four input terms on the right hand side. How to invest your money in the right assets is an aged old question. Your return on investment or ROI must exceed the general inflation rate, or else you will be losing purchasing power. Investing can be active, but preferably be a passive activity. How to invest is another topic all by itself. However, both Saving and Investing are equally important to reaching wealth.
In a nutshell, save to increase your networth; invest to maintain (or increase) your existing wealth.