Here are a few questions for you:
- Do you think that income and wealth are the same thing?
- If a doctor, CEO, professional athlete, or some other talented person earns a high income, does that automatically make him or her rich?
- Is our financial success judged simply by how much money we earn?
- Is a six-figure salary or higher the ultimate benchmark for measuring wealth?
Well, no matter how you might answer these questions, allow me to share what I’ve learned. You see, although there is a definite link between income and wealth, they’re actually two distinct financial measures.
And to clarify, income is the amount of money you earn in a given period of time, such as a month or a year. In other words, it’s how much comes into your bank account.
For instance, let’s just say that you happen to earn a million dollars per year. But at the same time, though, somehow you also end up spending all of it. So, in this case, do you add anything to your wealth?
Of course not. And the reason for this is because if you only focus on income as the standard for financial success, you’re really missing the most important yardstick for measuring wealth.
“And what would that be?” you wonder.
Simply this: It’s not just how much money you earn that matters–it’s how much you keep. Or, to put it another way, it’s not how much comes into your bank account–it’s how much stays in.
More specifically, the true measure of wealth is your net worth: the total dollar amount of all the assets you own minus all of your debts. So, this is the number that we want to be aware of.
Fortunately, calculating your net worth is pretty simple. Now, in order to do this, first, add up the current value of everything you own. These include:
- Cash in checking and savings accounts
- Stocks, bonds, mutual funds, certificates of deposit, government securities, and other investments
- Pensions and retirement plans
- Anything else of value that you own
And once you have the total current value of everything you own, add up the total amount of all debts that you owe. These include the amount due on:
- Your mortgage
- Credit cards
- Car loans
- Personal loans
- Educational loans
- Any other debts
Lastly, once you have the total amount of all debts that you owe, subtract what you owe from what you own, and you have your net worth.
Now, as far as how often to track your net worth goes, you may find it helpful and motivating to do this regularly–perhaps once a month as you’re starting on your journey to financial independence. Then, as you make progress over the years, calculating your net worth once a year may be enough for your specific situation.
