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Wealth growth opportunities are difficult to observe using traditional financial statements. In this case study, an analysis using a wealth-sensitive balance sheet and income-expense statement is presented to help identify corrective adjustments that promote wealth growth. Adjustments involve the application of straightforward financial practices such as paying off debt, living within means, saving and investing 10% of earned income, re-investing all investment income, and converting excessive depreciating assets into wealth producing assets. The analysis also includes an estimate of the direction and magnitude of wealth growth change that is likely to occur from taking a set of proposed corrective adjustments.
Key Words: financial statements, wealth growth, consumer lifestyle
Introduction
Walking back to my office I couldn't help feeling pleased. I was just returning from a wealth growth seminar presented by my upper division finance students. The students had done well; applying an integrated financial statement analysis, they had demonstrated how the Dover family could triple their annual rate of wealth accumulation in preparation for retirement. This was indeed a remarkable insight for the Dovers. Only ten years from retirement, these recommendations could dramatically change the landscape of their golden years. But the real pleasure I felt was for my students; their learning had increased. Their progress was especially meaningful considering that in the first week of class, when introduced to this case problem, their only recommendation for enhancing wealth growth was to invest part of the grocery money and the entire clothing budget to that end.
Wealth growth for retirement or other purposes has been an academic topic of interest for over a century. Family economic success was identified by Kinley (1911) in terms of five objectives: pursing maximum earnings and wealth, practicing efficient consumption, finding life satisfaction, reaching financial security, and accumulating wealth for retirement or for heirs. Since the time of Kinley, these objectives have been taught in one form or another (Muskie & Winter, 2004).
Monetary resources flow in and out of the household economy. Early in that economy life cycle savings out of earned income is a primary source of wealth accumulation. As Israelsen (2010) has further observed, we do not control the stock market or the economy; instead the wealth we accumulate is most likely to be determined by...