How to Measure Your Wealth & Net Worth
A humorous quote of Bob Hope goes "A bank is a place that will lend you money if you can prove that you don't need it." Said in jest though this may be, but in this day and age, nothing else could ring more true.
Technically, wealth is defined as an abundance of things of economic value, usually in the form of money, real estate, and personal property.
But how really is wealth measured?
Is it the amount of savings one holds in the bank; the six-figure income; the fancy house and the flashy car; or even the credit card statement that shows the balance is always paid in full?
Well it actually is a combination of all those things…and more.
The Net Worth Doesn’t Say It All
It used to be that one’s net worth was the penultimate gauge of whether someone should be categorized as rich or poor or somewhere in between.
And why not?
The classic formula of “net worth = sum of all assets – sum of all liabilities”, or what you own minus what you owe is as easy to compute as it is easy to understand with respect to wealth measurement.
What it is not however, is the sole accurate yardstick for calculating a person’s financial status.
While no one would argue that a person with a net worth of $100 million is indeed a wealthy man by any standards, try considering a 50-year old man with $200,000 savings in the bank and owns the home he lives in, but just lost a job without any good prospects in the near future.
Sounds kind of tricky this time, doesn’t it?
That is because many factors come into play when one talks about measuring wealth.
The net worth, while definitely a reliable figure on its own when sizing up a man’s fortunes, could still use some other figures to back it up.
Measuring Wealth Using Alternative Factors
If the net worth factor alone cannot do it, here are other aspects in an individual’s finances that may help to tell the whole story.
When one has not invested much yet, or has just started off paying equity on a new home, the net worth formula of measuring wealth would put you nowhere near even the neighborhood’s top 100 richest men list.
Factor in a whooping six-figure income though, and suddenly everything is seen from a different perspective.
While one may enjoy a good income however, this could also be dependent on other issues, one of which is the person’s employment status.
With even the once-mighty businesses and financial institutions going through some really tough times, it is difficult to be ever sure of the stability of one’s work.
However, if the security of a great paying job is in the cards for an individual, then he is well on the way to being man of means.
Personal Savings Rate
While some people may not be earning all that much, there are those who are still able to set aside some savings out of the money that they are earning.
As to how much or how little you can actually spare is called the personal savings rate.
What some people fail to realize is that a negative personal savings rate could mean that even if you have a significantly positive net worth at present, slowly exhausting your savings will ensure that you may become broke at some time in the future.
Rate of Return (ROR)
A Rate of Return is only possible for those who already have savings or investments in the form of stocks, savings accounts, certificates of deposits, or real estate property.
A $50,000 investment at present, if this remains untouched, will one day equal or exceed the $100,000 in cash stashed under the mattress.
While paying monthly amortizations to eventually fully own one’s home is obviously the more advantageous position to be in, the sad truth is that many Americans are actually paying for more than what their house is worth now – one of the many negative effects of the housing bubble.
Age and Family Status
The $500,000 net worth of a single, 25-year old computer whiz could look so much more promising than the $1 million net worth of a just-retired 55-year old former company employee who is still spending for the college education of his two kids.
Throwing in the age factor in many cases casts a whole new light into the state of finances of different individuals.
With the public’s consciousness of credit scores, particularly of having a good one, it can be said that an excellent credit standing can also be one factor to determine a person’s status on the prosperity bar, never mind the fact that it does not actually measure wealth but only projects an individual’s capability to posses it.
One need not look beyond the saying “health is wealth.” And while good health cannot be bought, preparing for the eventuality of sickness can be.
Having sufficient insurance is not the top priority of those who are simply living from paycheck to paycheck.
This makes the people who are able to purchase health insurance a class above the average American.
Wealth is Relative
Some of the factors mentioned above like health or age for instance are not as easy to quantify or included in the wealth equation as all others.
But then again, when you think about it long and hard enough, wealth is a relative matter after all.
Putting a number to the wealth or richness of one person is of course very crucial in many aspects of day to day living as acquiring a loan, putting up a business, leading a comfortable life, and perhaps even getting oneself into the Forbes list of The Richest and Most Powerful.
Therefore, it is but left for each one to ask himself at the end of the day, not the question “What is my net worth?” but rather, “How rich am I?”
How to Increase Your Financial Worth
Regardless of where you stand on the actual net worth calculation, you can take steps to increase your financial worth.
There is more to an individual’s worth than the balance of their investment portfolio or savings account – but having a positive cash flow sure does relieve a lot of stress.
Track spending for 90 days: get a small notepad that you can easily fit into your purse or pocket.
Every day for 90 days, track all outgoing and incoming money (even the pack of gum you picked up at the gas station!)
For many people, this is an eye-opening experiment that shows you exactly where you are wasting money, and often in ways you did not expect until you kept track.
Try this experiment over 90 days and see where you can reduce unnecessary spending to put more money toward paying down debts or into savings and investments.
Refinance whenever possible: if you can get a lower interest rate on your long-term debts, you can improve your financial situation by saving money on interest and either pay your debts off sooner or use the savings to boost your assets.
Develop skills people will pay you for: whether you own a business or work as an employee, you need skills that people will pay you for in order to earn money.
Almost everyone can be taught the skills necessary to work in low-income jobs, so if you want to increase your financial worth, you need to develop skills you can market as a business owner or an employee who receives promotions.
These are not necessarily job-specific or industry-specific skills, and do not have to come through earning a college degree.
Decide what you are passionate about, and take time to learn all you can about that topic.
Look for sources of passive income: passive income allows you to earn money without physically trading your time.
Business owners who do not actively participate in the day to day operation of the business but earn a profit are earning passive income.
Writers who create a book once and then receive royalties every time their book sells are earning passive income.
People who buy property and rent it to tenants are earning passive income.
There are many ways to earn passive income, and having one or more passive income earning activities is a great way to increase your income and assets.
Most passive income opportunities can’t be measured accurately in a net worth calculation since the income is earned over time, and may fluctuate, but having passive income increases your overall financial worth.
Be Happy with What You Have
It’s important to realize that not everyone needs to keep up with the Jones’s or have a mansion or other expensive luxuries in order to feel worthy.
If you are completely happy with your current income level then maybe your actual net worth doesn’t matter as much.
If the income you currently earn covers your living expenses, allows you to plan for your future needs, and provides for enough of your wants that you are satisfied – then you’re probably already in that “place” in life that many others are constantly chasing through growing their net worth!