The Wealth Grid is a simple, but powerful tool for visualising the importance of avoiding unnecessary debts and building up personal wealth through saving and investing.
The grid is split into two halves, with wealth represented in the top half and debt in the bottom half. The gradually increasing number of black dots on both halves of the grid represents the increase in wealth or debt that a person can accumulate.
Since there is no cap on the amount of wealth (or debt) that an individual can accumulate, the grid is effectively never ending, but restricted to a representative size for this article.
The red line down the middle signifies the point where a person is not in debt, but at the same time does not own any significant assets. This represents the general status of most people at the start of their lives.
As we progress through our lives, the objective is to generate as much wealth as possible, continually progressing up the Wealth Grid until our retirement. However poor money management and a failure to generate wealth will see people ending their years just scraping by at the middle or worse, in the debt-laden bottom half.
How To Climb The Wealth Grid
The simplest way to build wealth and climb the grid is to spend less than you earn, and each month place the money left over into a high-interest savings account or investing in the stock market through a tax-free ISA.
In fact, spending less than you earn is the very premise of the Money Saving Challenge, where the aim is to try and save £250 a month by switching to cheaper providers and cutting down on non-essential costs.
Somebody saving £250 a month (equating £3,000 a year) for 30 years could build up a nice little nest egg of £155,000 (assuming an interest rate of 3%, with the interest re-invested each year).
Investing that same amount in the stock market is likely to grow that nest egg even more. Assuming they are able to get a regular return of 7% and continued to re-invest these returns, they would end up with stock worth £328,000.
It is quite possible to save your way to becoming a millionaire, simply by putting money aside each month (although it may take you a while!). Take a look at the Save a Million Pounds post to see how long it would take you to save your first million.
Sensible spending and saving begins by creating a budget to understand where you are wasting money and then using money saving ideas to cut back on your essential and non-essential spending.
In addition to sensible spending and saving, other factors that will help a person to progress up the wealth grid, include:
- Carving out a well-paid career or starting a successful business
- Smart investment in assets that will grow in value or produce a regular income
- Ability to avoid (or foresight to insure against) incidents of misfortune, such as accidents, illness or long-term redundancy
- Inheritance or other acts of good fortune, such as lottery win
More information on wealth building can be found in the following two guides:
How To Get Out Off Debt
Most people tend to start accumulating debt during their late teens and early twenties, when they borrow money to buy a first car, go to university, fund a gap year or simply max-out a couple of storecards.
Some debts, such as mortgages are unavoidable, as few people can buy a house outright. However most debts are unnecessary and should be avoided wherever possible.
The key issue with getting into debt is that it prevents you from building wealth and progressing up the grid. This may not seem like a problem in your early twenties, when you have got your whole life ahead of you, but later on large, unpaid debts can prevent you from owning your own home, supporting your family properly and being able to retire young.
Facing up to and paying off large debts can be a bit of a turmoil (I should know I have done it twice), so here a couple of guides to help you get started:
I mentioned mortgages earlier on. A mortgage is probably the biggest single debt that most people will take on, but unlike credit card borrowing or hire purchases, a mortgage is what I would regard as a good debt.
This is because it enables you to purchase an expensive asset – a property – which in many cases stands a good chance of holding or even appreciating in value in the future.
Other assets that people buy, such as televisions and cars will only lose value once they have left the shop or showroom. That’s why borrowing money to buy depreciating assets is regarded as bad debt.
Of course, good or bad, a debt is still a debt and the sooner the mortgage is re-paid the higher up the grid you can progress. In the following post: Mortgage Over-Payments: Should I Pay-Off My Mortgage or Focus on Saving? – I look at the pro’s and con’s of saving your spare money or trying to pay off your mortgage as soon as possible.
A Game Of Life
In a way the Wealth Grid is like a board game, similar in parts to Monopoly and Snakes & Ladders. Just like Monopoly, the aim is to make good investments to build wealth, enabling you to move further up the grid. Whilst at the same time you need to avoid the mistakes and bad luck snakes that will have you sliding back down the grid again!
