Do you want to become wealthy?

Then, you need to understand how to build wealth.

Building wealth comes down to understanding and mastering two accounting formulas.

CEOs and CFOs of all businesses are paid tens of millions of dollars annually based on how well they use these two formulas.

But despite the importance of these two formulas for building wealth in the world, most people have no clue of these formulas and how they relate to building wealth.

I have an advantage over most people because I am a CPA. I use these two formulas daily to build wealth for myself and my clients.

Let me share these two accounting formulas with you so that you can understand them and use them to build your own wealth.

What’s Your Net Worth

How much are you worth? You get asked that question often.

Your net worth means your wealth.

How to Calculate Net Worth or Wealth

The formula to calculate net worth or wealth is as follows:

Value of your assets - your total debt =net worth or wealth

Take the total market value of your investment assets and subtract your total debt. This difference equals your net worth or wealth.

You should only include the value of your investment assets(stocks, real estate, business interests) in your total assets figure. Don’t include personal assets such as vehicles, jewelry, furniture, etc..

You should include all of the debt that you owe to anyone.

The difference between your total investment assets and your total debt equals your net worth or wealth.

Using This Formula to Build Wealth

You increase your wealth by purchasing investment assets with your cash.

You also increase your wealth by paying off your debts with your cash. Conversely, you decrease your wealth by incurring debt.

In summary, you build wealth by purchasing investment assets and paying off debt.

The most important takeaway is that you need cash to buy investment assets and to payoff debt.

Where will the cash come from?

How to Get the Cash to Build Wealth

The next accounting formula shows you how to get the cash to invest and to payoff debt.

The cash flow formula is:

Total income - total expenses = net cash flow

Take your income from all sources and subtract from this amount your total living expenses. This net difference is your net cash flow.

In order to generate net cash flow, your income must exceed your expenses. This net cash flow represents your surplus or savings.

You take your savings and purchase investment assets and pay off debts.

This is the way to build your wealth.

Now, if your expenses exceed your income, you are incurring a deficit. In order to finance that deficit, you must borrow, increasing your debt level, which will decrease your wealth.

You will never become wealthy spending more than your income.

Conclusion

If you understand and master these two formulas, you are on the path to becoming a wealth generating machine.

This is how the CEOs and CFOs build wealth for their companies.