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Why mastering personal finance is just as important as investing returns for wealth

I’m sure most people want to be wealthy at some point in their lives. I think personal finance is extremely important to achieve your wealth goals.

How much do you need to become wealthy? $1 million? $2 million? I’ll leave that to you. But my point is that personal finance is an extremely serious part of the equation.

If you invest a sizeable $10,000 and manage to compound it at 15% per year for a decade, you have $40,456. That’s a great return, but obviously not enough to reach $1 million by a long shot, even if you managed to invest in the best growth shares on the ASX like Altium Limited (ASX: ALU) and A2 Milk Company Ltd (ASX: A2M).

To get to $1 million or more, you have to contribute a lot of money yourself into your investment pot. That requires a good temperament and discipline to spend less than you earn over a sustained period of time.

Sometimes how much you save can have a far bigger impact than your investment returns. For example, if a frugal person invested $2,000 a month for 10 years into an exchange-traded fund (ETF) that returned 10% a year, that person would end the decade with $382,500.

Compare that to good-performing investor who made investment returns of 15% a year over a decade, but only invested $1,000 a month – that person ends with $243,645, substantially less. If the investor could keep returning 15% for many decades their wealth may overtake the frugal person’s, but that’s a big ‘if’ on the performance side.

Other than starting investing and compounding earlier in your life, the best thing you can do for your wealth that you can control is to invest more by having better personal finances than your peers.

Foolish takeaway

If you invest as early as you can and invest as much as you (happily) can, then your future wealth will undoubtedly do well. There are many elements to personal finance including maximising the value you get from your budget, improving your personal income and avoiding debt where possible. 

Once you’ve ticked the personal finance box then you can just focus on getting the best investment returns possible, which might come from these quality ASX growth shares.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of A2 Milk and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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