I was reading The Millionaire Next Door again and found out that I am wealthy! The authors offer a calculation to determine if you are wealthy, just multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be. Why does it matter? It affects my whole life!
I never thought I was wealthy or rich! These are words I always thought applied to someone else. You know what I mean, the people who lived in large homes, earned seven (7) figures and could do anything they wanted. People like doctors, celebrities and business owners. Wait a second, I was a business owner! The difference was I never earned seven (7) figures (net) in any year. I definitely did not live the wealthy lifestyle that you see in the movies. That’s fiction anyway!
Funny, how we rely on those fictionalized ideals of wealth or do we? We all know rich people; they may be relatives, friends or neighbors. It may perpetuate the myth of wealth or provide a completely different image. As an entrepreneur, I met a lot of successful people through the local Chamber of Commerce. Networking with other successful people helps you succeed too. How did I recognize who was successful? All you had to do was go to their business and look! I had a restaurant and I could tell right away how much they were earning by just watching their traffic.
You don’t have to share your net worth or ask how much they are earning. Would you recognize a successful person by just looking at them? I don’t think I would know either! Supposedly, you tell a rich person in Texas by their hat and boots. Rich people do not wear their labels out to impress you. They may even dress down to avoid attention. Have you ever seen Warren Buffet? Enough said! We often networked at different restaurants and could see how busy they were as the meetings ended. It was great trading secrets.
Why should you calculate your net worth? You want to establish a baseline so you can measure your progress to your financial goals. If you never calculated your net worth, all you need are your assets less your liabilities. Assets generally are something that generates cash and liabilities are debt or obligations owed to others. Net worth is a measure of an individual’s or businesses’ value or worth on a particular date. A company or individual is more valuable as their net worth increases. Most individuals use net worth to guide their financial decisions. If you have a lot of cash, you should put your savings to work to earn more money.
Most people include cash, home equity and stocks and bonds as assets. Liabilities are usually a mortgage, credit card debt, auto loans and student loans. You usually include market value of your home in assets and the mortgage in liabilities. Negative net worth would be a danger signal. It would mean your outstanding debt is more than your assets. It is a signal you should pay down debt! Your goal is to have a positive net worth and watch it grow over time. This is why you calculate a baseline number to track your progress. The goal is to have sufficient net worth to retire sometime in the future.
How much is enough? Everything depends on how much you need in retirement. If you were earning $100K while you were working, how much do you want in retirement? Have you thought about how much you need to live reasonably in retirement? This no easy task since the stock market has it ups and downs. How will you avoid the pitfalls of investing? Your net worth is just a measure of your value, but you can use it to measure your progress. How much will you need to retire?
How long will you live in retirement? If you had a million dollar net worth, you could comfortably withdraw $40K for 25 years. If you need $80K to live in retirement, you would need a two million dollar net worth. Saving and investing is the best way to increase your net worth. You can invest in assets such as a business, income property or other things of value to grow your net worth. There are two (2) main factors to figure out your net worth to support your retirement; length of time in retirement and how much you need in terms of income. Start early, time is on your side!
Wealth is different for everyone and different by every age! Will you have enough in retirement to support your lifestyle? You need to start saving and investing now to reach your goal. It is no secret that Social Security was never intended to support you in retirement. It was always a safety net and you were supposed to save enough to make it a comfortable retirement. A little early planning will make it much easier to reach your goal. A net worth calculation establishes a baseline to help you measure your progress. What are you going to do? Let me know in the comments. I am already wealthy and retirement will be fine!
Photo by: erOOmbOb
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