Friday, January 6, 2012

Wealth With Responsibility

The X-Curve concept of Wealth and Responsibility: 
This concept theorizes that a person's responsibilities generally decreases and wealth generally increases over time. Every peso you save will correspondingly go towards decreasing your responsibility. 

While we are young, we are generally less secure as we are still starting up; our salary is low, our kids are still schooling, we are still starting out in life and most probably no house or car, yet. So, at this point in time our responsibility is at its highest as well. At this stage in our life, our concern is what if we die too soon? The solution for such is to have an insurance so that our family will be taken cared of and their needs for education and sustenance will be provided should you, the income earner, unexpectedly die or be disabled.  

* Courtesy of IMG.

On the other hand, as we grow older, ideally, we should have accumulated enough wealth to make our responsibilities go to zero. At this stage,
we should be generally more secure. But what if we live too long? At retirement age, we are not working anymore or no more active income, so the solution for this is to have adequate investments, to take of care of your future. It is from your savings that you will draw income, in other words, you will be "living on interest" or LOI. 

The Wealth Formula:
But how do we build our wealth? Factors to consider is as shown on the illustration above. As we can see, Money is first on the list. Money begets money. In order to have wealth, foremost, one must have money, that is, we need to have savings so that we can start growing it. And next, Time, is an important factor due to the power of compounding interest. It takes time for money to grow, it takes years, 5, 10, 20 years for you to save for your retirement savings in order to be adequately provided in your old age. Thirdly, the Rate of Return or the Interest Rate for your investment plays a significant role in your quest for a successful financial future. If you put it in banks as savings deposits at 4% compared to 12% for mutual funds perhaps, then the difference in the rate of growth is so significant. Fourthly, we should consider inflation. At present, the Philippines has more or less 5% inflation. That means, the prices of goods and commodities doubles about every 14 years. And lastly, Taxes, which is an inevitable fact of life, from birth to the grave, it surely will follow you. It is normally at 20% and it is taken by the government as a withholding tax on your bank savings and other investment (unless you keep your investment for 5 years, in the case of mutual funds). 

So, "You must take care of your responsibility while building your wealth."


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