The Wealth Building Formula™ Made Simple(ish)
If the thought of math makes you break into a cold sweat, don’t worry—we’re not about to drag you back to high school algebra. But here’s the thing: understanding and working your Wealth Building Formula™ is essential if you want to achieve financial independence, and trust us, we’re going to make it as painless (and dare we say, fun?) as possible.
Think of it like baking a cake. You need the right ingredients (cash), the right baking time (time horizon), and the right temperature (investment return) to get the result you want (financial freedom—yum!). But unlike a cake, your financial future doesn’t come with a preprinted recipe. That’s where the Wealth Building Formula™ comes in.
This week, we’re breaking down the variables in the formula—cash, time, and return—and showing you how to “work your formula” to make smarter financial choices. And yes, we’ll sprinkle in a little humor because, let’s face it, talking about finances can feel like eating dry toast when it should feel like cake.
The Formula: Break It Down, Baby
Here’s the magic equation:
C x T x % Return = $$$
Translation:
- C (Cash): The amount of wealth you’ve saved or invested and how much additional you have to save annually.
- T (Time): The time frame in which you want to achieve financial independence.
- % Return: The long-term return your investments need to achieve your desired goal.
- $$$: The annual cash flow you need to live the life you want once financially independent.
This formula isn’t one of those vague “rules of thumb.” It’s a personalized roadmap that gives you clarity—and options. Let’s break it down with some real-world scenarios (and a touch of humor, because why not?).
C is for Cash (Not Cupcakes)
“C” stands for the investable cash you’ve saved to date and the additional amount you must save annually. Think of it as the foundation of your financial cake—it’s what everything else builds on.
Here’s the deal: The more cash you can save now, the easier it will be to reach your goals. Why? Because more cash means you can either shorten your time frame (T) or reduce the return (% Return) you need from your investments (this also reduces portfolio risk), or if T or ROI stay the same, you will wind up with a lot more wealth than you need.
Example:
Let’s say Taylor, age 35, wants $100,000/year in retirement cash flow starting at age 60. After running the formula, Taylor learns they need $3.5 million invested by age 60 to make it happen. If Taylor can save $30,000/year starting now, they can hit that target with an average 7% annual return.
But here’s the kicker: if Taylor can bump their annual savings to $40,000, they’ll hit their goal years sooner or need a less risky 5% return on their investments.
Takeaway: The more you save now, the fewer trade-offs you’ll face later. So yes, max out that 401(k), and don’t leave that employer match on the table—it’s free money!
T is for Time (and the Magic of Compounding)
If cash is the foundation of your cake, time is the oven. The longer you let your investments “bake,” the more delicious your results will be thanks to the magic of compounding.
Here’s the Science (and the Humor):
Compounding is like yeast for your money. It starts slow, but over time, it grows exponentially. The earlier you start, the less heavy lifting you’ll have to do later. But if you start too late, you’re going to need a lot more dough (pun intended).
Example:
Meet Alex and Sam.
- Alex starts saving $10,000/year at age 25 and stops at age 35 (10 years total).
- Sam waits until age 35 to start saving $10,000/year and saves until age 60 (25 years total).
By age 60, Alex has more money than Sam—despite saving for only 10 years. Why? Because Alex gave compounding more time to do its thing.
Takeaway: Start now, even if it’s just a small amount. As Al Zdenek says, “Saving now rather than later is the key to winning the wealth game.”
% Return: How Hard Should Your Money Work?
Now, let’s talk about the “oven temperature” of your formula: your investment return.
The higher the return you aim for, the harder your money has to work—and the more risk you take on. It’s like trying to bake a cake at 500 degrees. Sure, it might cook faster, but there’s a good chance it’ll burn.
Example:
Taylor needs $3.5 million in 25 years.
- If Taylor’s investments earn an average 7% return, they can save $30,000/year to hit their target.
- If Taylor earns only 5%, they’ll need to save $40,000/year.
- If Taylor can earn 9%, they could save just $20,000/year—but they’d be taking on substantially more risk (and possibly losing sleep at night).
Takeaway: Balance is key. Work with an advisor to find the right mix of investments that aligns with your risk tolerance and long-term goals.
Real-Life Example: Working the Formula
Let’s say you’re Samantha, a 40-year-old working mom juggling family expenses and retirement savings. You want $80,000/year in retirement income starting at age 65. Here’s how you’d work the formula:
- Define Your Cash Flow Needs ($$$): $80,000/year.
- Set Your Time Frame (T): 25 years until retirement.
- Estimate Your Target Wealth (C): Using a 4% withdrawal rate, Samantha calculates she’ll need $2 million by age 65.
- Run the Numbers:
- If Samantha can save $20,000/year and earn 6% annually, she’ll reach her goal.
- If she can only save $15,000/year, she’ll need to earn 8% annually (higher risk).
By understanding how the variables interact, Samantha can make informed decisions. If she wants to reduce risk, she might look for ways to save more (like cutting unnecessary expenses) or extend her timeline.
How CakeClub™ Helps You Work Your Formula
At CakeClub™, we’re here to make working your formula simple, intuitive, and even fun (yes, fun). Here’s how we help:
- Run the Numbers: Input your goals, time frame, and current savings in the on-line retirement calculator at www.CakeClubapp.com to calculate your personalized Wealth Building Formula™.
- Track Your Progress: At least annually, see how your investments, savings, and cash flow are working together.
- Explore Scenarios: Play around with different variables (e.g., saving more, targeting different returns) to see how they impact your plan.
- Follow CakeClub™ for finding other sources of cash flow to speed up your trip!
Think of us as your financial sous-chef—helping you mix the perfect recipe for financial freedom.
Your Challenge for This Week
This week, take 15 minutes to run your own Wealth Building Formula®. Here’s how to start:
- Define Your $$$: How much annual cash flow do you need to live the life you want in the future?
- Set Your Time Frame (T): When do you want to achieve financial independence?
- Estimate Your C and % Return: How much have you saved, and what return do you need to hit your target?
If you’re not sure where to start, download the CakeClub™ app for step-by-step guidance.
Let’s Work Your Formula Together
Ready to take control of your financial future? Download the CakeClub™ app today and start working your personalized Wealth Building Formula™®. Because when it comes to your finances, life’s too sweet not to enjoy.”
Closing Thoughts: The Formula for Freedom
Understanding the Wealth Building Formula™ isn’t just about numbers—it’s about empowerment. It’s your roadmap for knowing how every dollar you save, every year you wait, and every investment choice you make impacts your future.
So, take control. Start working your formula today, and remember: when it comes to your financial freedom, you deserve to have your cake—and eat it too.