Are we creating wealth with the level of earnings and spending we maintain throughout our lives? This is an important reflection that reveals what we’ve done with the money we’ve earned, whether we’re getting richer or poorer, and whether we’re saving enough to guarantee a standard of living in the future.
The annual income tax return, although laborious and boring, is valuable for analyzing our finances and helps answer the question. We just have to take a different look at it, far beyond the mere obligation of reporting to the IRS, trying to understand not the numbers themselves, but what they reveal.
An interesting reading is to observe what our sources of income are. At the beginning of adulthood, it is natural that all income comes from work. However, after a certain age, it is desirable that we have other sources of income, such as rental properties and bonds that pay interest or dividends, as well as assets with potential for appreciation that can be sold and turned into income.
OUR WEALTH
In the assets and rights sheet, movable and immovable assets, residential real estate, other real estate, vehicles, financial investments are listed. Taking a good look at this list allows us to assess how much of our equity is made up of assets with potential for appreciation and how much is allocated to assets that depreciate over time, such as old or unoccupied vehicles and properties.
Real estate for family use, such as residential, and vehicles, do not generate income, only expenses, and although they are important achievements, ideally they represent only part of the total assets. Investing in assets that generate income is an excellent strategy to achieve financial independence.
ASSET DEVELOPMENT
How much did you have the year before and how much do you have now? The answer to this question makes it clear how much of their income was destined to the formation of wealth. If the variance was negative or neutral it means that you spent practically everything you earned.
Antônio, for example, earned R$160,000 from work and financial investments. The total assets and rights held on December 31 of the previous year was R$ 640 thousand against R$ 600 thousand in the current year. It means that he spent all his income and destroyed R$ 40 thousand of the wealth accumulated in previous years.
If you find yourself in a similar situation to Antonio, assess whether the fact reflects decisions that were consciously made. Check if it is possible to increase your savings capacity to increase your wealth. Remember that, in the future, he will provide much of the income that today depends exclusively on his work.
Teresa earned less than Antônio, earning BRL 110,000 exclusively from work. Her equity is similar to Antônio’s, around R$600 thousand in the previous year and R$630 thousand in the current year. Teresa managed to save 27% of her income and increased her wealth by R$30,000. Last year was a good year for Teresa, if she can maintain this pattern, we can say that she is going in a good way.
It is worth remembering that all goods are declared at acquisition value. Therefore, Antônio cannot use the argument that his equity has decreased due to the devaluation of the assets, except that he has effectively sold an asset for a value lower than the purchase price.
The equity evolution also records the amount of debts and real liens, another important indicator that reveals the level of indebtedness and allows us to observe how much of the equity was purchased with third-party resources.
When the level of indebtedness increases and equity remains stable or decreases, a warning sign, basic consumption is being financed with loans, an unsustainable situation in the medium or long term. Good time to step on the brakes and check which expenses can be reduced or eliminated and trying to improve the destination of family income.
Ah, I cannot fail to point out that when the equity evolution is high, taking practically all the year’s income, there is a problem in sight. Review the statement for any errors or omissions to avoid getting caught up in the fine print. The IRS is always on the lookout for inconsistencies like this.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
