All of these misers got rich, not by being misers (I’m sure it helped … a little!) but, by having a business; Mr Krabs has a hamburger joint. Nice cashflow business that – perfect for providing the funds to invest in all sorts of stuff.
And, I bet he owns the building …
Mr Krabs has one other advantage over his predecessors: he reads personal finance blogs!
I know this, because “Eugene Krabs” left his secret formula for wealth in a seemingly innocuous comment on Free Money Finance’s blog:
I’ve boiled what I’ve read myself down to the following equation:
Wealth = Capital + Risk + Time
(To be clear, capital is the money you have right now to make more money with.)
Technically, any one of those factors can do it for you. For example, if you have a massive amount of capital, or if you take massive amounts of risk and beat the odds, or if you have a lot of time to build your wealth, then you can still become wealthy at the expense of the other two factors.
However, there are downsides to all of these individual factors.
The formula itself needs a little tweaking, but ‘sensational’ nonetheless, for example it’s probably better written as:
Wealth = Capital x Risk x Time
Here’s how to make it work for you; if you are an:
– Ordinary person: do nothing … your wealth will not grow. In fact, it will decline in real terms, as inflation takes its toll. You can offset this, to a greater or lesser extent by cutting costs (including interest costs and living expenses). Whole legions of people swear by this approach.
– Reasonable person: limit your risk, and offset your limited capital by applying Time … lots of it (provided you are happy to work for 40+ years, don’t get sick or lose your job, etc., etc.), and pay yourself first to increase your capital by roughly 10% each year.
– Extraordinary person: you also make a 10% improvement, because that’s reasonable, achievable, sensible … but, you don’t make a 10% improvement in just one area, you do it – as Eugene Krabs suggests – across all three!
Look at what happens if you apply one unit of Capital, one unit of Risk, and one unit of Time: you gain one unit of Wealth.
But, what happens if you increase your:
1. Capital by 10% – let’s say by starting a business on the side and applying at least 50% of it’s net income to your investment capital?
2. Risk by 10% – let’s say by moving from investing in Mutual Funds to individual stocks (if you buy/hold one, you buy/hold the other)?
3. Time by 10% – let’s say you allow yourself 10% more time to get there?
Nobody would be too scared by making a 10% improvement in one are; so, what’s so hard about making it in three areas at the same time? If you do, you end up with 1.1 units of each of: Capital, Risk, and Time: 1.1 x 1.1 x 1.1 = 1.33 …
… your wealth doesn’t increase by just 10%, it increases by 33%.
Of course, you want to REDUCE time, not increase it, so play with a simple annual compound growth rate calculator and see what happens if you:
i) Double your Capital (increase your savings; reinvest 100% of your side business earnings; grow your side-business even more)
ii) Double your Risk (buy/sell your stocks; buy/rehab real-estate; start a ‘real’ business)
iii) Halve your Time
2 x 2 x 0.5 = 2 … how’s a 100% increase in your wealth suit you?
BTW: for the mathematicians out there, this simplistic formula is nonsense; for example, as your wealth increases over time, any ‘spare’ wealth (i.e. that you don’t spend) increases your Capital (thus compounding either/both until your Capital converges to your Wealth … but, never quite meets it), whereas Time is linear (as long as we don’t approach the Speed of Light), and Risk is certainly neither linear nor compounded.
But, that’s not important right now … 😉