The Wealth Formula, and why at least a 5% Return is a Must

The wealth formula determines the amount of wealth an individual will have from a starting principal value after accounting for inflation, rate of return, time, and taxes. The Wealth Formula goes as following:

Money

+ Time

+/- Rate of Return

- Inflation

- Taxes

----------------------------

WEALTH

In the next section I will be giving a few examples, and I will take all the examples into account for one year. I am using 25% tax on the gain, and avg 3.5% inflation in my calculations.

If you have $100

@ 2% interest + $2

Tax @25% - $.5

---------------------

Net After Tax $101.5

Inflation @ 3.5% - $3.5

---------------------

WEALTH $98

In this example you are losing money as shown in the solution (loss of $2).

Is losing money an option? Absolutely Not

Let's see the calculations when interest rate is 5% or more.

If you have $100

@ 5% interest + $5

Tax @25% - $1.25

-------------------

Net after Tax $103.75

Inflation @ 3.5% - $3.5

-------------------

WEALTH $100.25

As you can see when I use an interest rate of 5% I get an ending value (wealth) that is higher than $100; on the other hand, an interest rate of 2% gave a return that was lower than the initial value. That's the reason I recommend investing in the solutions, which give at least 5% returns or more.