Understand the Variables in Wealth-Building

You want to be as prepared as possible before you start investing, which is why we’re looking in detail at planning. When you’re building wealth, there are just a few variables at play which will determine your trajectory towards your goals:

• Monthly/Annual Savings – Usually this is the input variable. What that turns into depends on the other variables
• Time – Time is always your friend when it comes to wealth-building, because it allows the magic of compounding to do its thing. As wealth-building is usually best done over decent periods of time, this variable is usually expressed in years
• Return – This is the percentage that your money is assumed to grow by each year. It is a function of the risk you’re taking, of which more next week. When planning it’s usually best to err on the low side
• Inflation – this is a factor working against you. I ignored it in the house-purchase example above because of the short timescales. But the easiest way to factor in inflation is to subtract it from your assumed return. It’s a clunky way of dealing with it but it serves the purpose
• Costs – Another negative factor, and another reason to keep your assumed growth rate low. Every pound you pay in charges is a pound not in your own pocket, so this is a biggie. Tax is a subset of this variable
• Wrapper Choice – As I mentioned, there are some account types like LISAs and pensions which offer you money to invest into, and you can factor this in to your plans

Understanding the interplay of these variables is key to building your wealth successfully and getting to your goal as directly as possible.

Financial planning is essentially the application of maths, plus an understanding of how the finances system affects that maths with things like tax-relief and taxation. It’s the latter that keeps me in a job, but the maths bit is actually pretty easy.

Professionally, we tend to deal with clients at the other end of their wealth-building journey, where it is more complex, because there’s lots more pots of money at play. It’s my job to know about that stuff, but you don’t need to know it at the New Accumulator stage.

The post Understand the Variables in Wealth-Building appeared first on Meaningful Money – Making sense of Money with Pete Matthew | Financial FAQ.

* This article was originally published here