When I was doing my Bachelors in Engineering some time back I came across a set of problems called “optimisation problems”.
Optimisation involves using the least amount of effort and resources to maximise output.
I believe wealth creation is an optimisation problem and we can use the tools of engineering to solve it.
In any optimisation problem we have to define the output or result we want. In our case this could be an income level, savings, investments, etc.
We then describe a function or model to deliver the intended output. In money terms this is a very basic linear equation:
(Income – Expenses = Profit = Savings + Investments = Wealth)
Once we are clear on the function we then describe the individual variables and what drives them. For instance income is derived from the value we give in exchange for money. This value depends on the extent to which we can consistently meet customers needs. It also depends on the number of people we can serve. Expenses are largely driven by our lifestyle.
We then place constraints on the defined function. For example our expenses MUST not exceed income at any point.
We then solve the equation. This is a simple linear equation and the way we maximise profit is by maximising income and minimising expenses. We also notice that this function has no upper bound. Meaning the income we can achieve is virtually unlimited. This equation however has a lower bound which occurs when expenses exceed income to the extent that we can borrow. As long as expenses exceed income we cannot create wealth.
When we allocate our profits efficiently into savings and investments we introduce an exponential function which takes advantage of the compounding effect and we then accelerate our journey to wealth.