Question: Describe how wealth is built over time. How do your personal cash flow statement and your personal balance sheet assist in this process?

Please respond to two students

Student 1:

Wealth is built over time by having a continuous stable income and with that income investing in assets or reducing debt. When you reduce debts and increase investment you build a greater net worth. Net worth = value of total assets (investments, savings etc.) - Value of total liabilities (debt) If you are able to make the value of your assets greater than the value of your liabilities you have a positive net worth by continuing to increase investing and not accruing more debt you build wealth. By using a cash flow statement in your quest to build wealth you are able to look at how your income and expenses correlate and see where you can make cuts financially in order to either invest and save more money or pay off the liabilities that you have. If you see a trend in your spending that you could cut in order to save more money or use that money to pay debts it is a perfect took to use the cash flow statement to build wealth. You would use a personal balance sheet to determine if you are building wealth looking at your gains or loses quarter to quarter.

Student 2:

Wealth is built overtime when you maximize your cash inflows (money you earn) and minimize your cash outflows (money your spend).

It is also important to define what is a need vs. a want. You need to know what you can afford with your current financial sitaution and move away from reactionary purchases that cause immediate satisfaction vs. investing in a financial future that increases your net worth with time.

A personal cash flow statement allows you to measure the money you earn and the money you spend. This will determine if you are spending within or out of your means. The personal balance sheet is a tally of your assets and liabilities that at the end will provide you with your net worth. These tools put your spending and saving into perspective. It helps you see how and where you are allocating your money and puts you in control of allocating money differently to help build your net worth (wealth).

Wealth is built by decreasing your liabilities (debt) and increasing your net-worth. If you have an income (does not have to be a significant income) and live within your means with no debt and live a "simple" life you can invest your money that will in-turn increase your net worth.

These statements and balance sheets must be reevaluated periodically when assets or liabilities change.