If you can remember and understand the following three financial formulas, you’ll be well on your way to building wealth. They’re not complicated, they’re not fancy, but they will put you ahead of 90% of the population. Well, I don’t really know that 90% figure is true, but it sure seems that way!

**Formula One: The Debt Formula**

In simple terms, 2 – 3 = **DEBT**. If you spend more money (represented by the 3 piles of money) than you earn (represented by the 2 piles of money), you will go into debt. There is no way around it. Spending even one dollar more than you earn is bound to lead to financial destruction if carried out over a long enough period of time.

**Formula Two: The Broke Formula**

Once again in simple terms, 2 – 2 = **BROKE**. If you spend every penny you make, you will be broke. There is no way around it. You will be living paycheck-to-paycheck until you can break the cycle and begin following Formula Three.

**Formula Three: The Wealth Formula**

OK, this one is a little more complicated, so pay attention! 2 – 1 = **SAVINGS**. If you spend less than you earn, you’ll have money left over to save. If you take that savings and invest it, you get **WEALTH**. How do you invest it? There are numerous ways, but here are a few:

- Pay off debt!
- Invest in yourself! (Education & Training)
- Invest in the Stock Market! (In a low-cost, tax-efficient, diversified portfolio)
- Invest in Real Estate! (Be careful with this one!)
- Start a Business! (Probably the best option if you have entrepreneurial skills and a good business idea)

**That’s All the Math You Need!**

Well, there is one other formula you’ll need to understand – compound interest. We’ll talk about that later though. For now, just figure out how you can start following The Wealth Formula if you’re not already. Oh, and don’t spend any more time trying to figure out other financial formulas just yet. This will be all you need for a while!

I like the sophisticated pictures and examples that you use to give everyone a full perspective of what debt is. It is kind of funny that we really do need photos such as this one to tell us if we are in debt or saving money. Great photos, though.

Comment by John — December 3, 2008 @ 9:23 am

Thanks, John. I’m glad you like them! I wanted to make some simple pictures to communicate the idea of “Spend Less Than You Earn”. It’s probably the simplest but most often overlooked piece of financial advice anyone can use. America might be in better shape if more people actually followed that advice.

Comment by Paul Williams @ Crackerjack Greenback — December 3, 2008 @ 9:34 am