Are you prepared for a layoff, illness or divorce?
In his books and in his talks, R. Buckminster Fuller often spoke about the power of words. During an extremely low point of his life, he realized that many of his problems began with words. “I became very suspicious of words,” he said. At one point, he decided to be silent until he was sure of the meaning of every word he spoke. His silence lasted for more than two years.
But as I followed what Fuller said during my studies, I could hear my rich dad saying over and over again, “Your house is not an asset.”
During one of the classes I attended, as Fuller spoke to our class, I realized how much of a head start I had, just by simply knowing the difference between the words asset and liability. Rich dad’s simple drawings—the diagrams he sketched time and time again—allowed me to see what most people cannot see. Millions of people are in financial trouble because they call their homes and cars assets rather than liabilities. Worst of all, most people have no idea what an asset really is.
It’s possible that the two most important words in the world of money are cash and flow. Cash flow determines whether something is an asset or a liability. If you understand the meaning of the words, cash flow, asset, and liability, your chances for a richer life are greatly improved. The reason most people struggle financially is that they have lots of cash flowing out—and very little flowing in.
Another important word is wealth. Fuller defined wealth as “your ability to survive X number of days forward.” Rich dad defined wealth by asking, “If you stopped working, how long could you survive?” It’s estimated that the average American can survive less than a month without working. This is why millions cling desperately to a job and a steady paycheck. They may have a job, but no wealth.
The reason Kim and I could afford to retire at 37 and 47, respectively, was because we focused on our wealth. We focused on acquiring assets that produced cash flow.
We did not focus on the words job security, paycheck, or investing for the long term in the stock market. And rather than focus on the word saving, we focused on the word debt and used debt to acquire assets.
Being Wealthy is More Important than Being Rich
The terms “rich” and “wealthy” are usually used interchangeably. As Fuller defined wealth in time, so did my rich dad. My rich dad said, “rich is measured in money, and wealth is measured in time. Most people focus on getting rich rather than becoming wealthy.” Most people think that if you have $1 million you’re rich. But if your expenses are $100,000 a month, you could only survive 10 months.
Have you considered if you or you and your spouse suddenly were laid off, divorced, or became ill, and you had to stop working today, how many days could you survive financially on the money you have—maintaining your current lifestyle?
In order to calculate your wealth, you first need to determine what your monthly expenses are. Next, calculate how much money and assets you currently have. Remember, this exercise assumes you do not have income from a job. Once you know your total monthly expenses and your sum total of money available, you can determine your wealth by dividing your total sum of money available by your monthly expenses. This gives you your wealthy number, measured in months. Here’s the formula:
The total amount of money ÷ total monthly expenses = wealth number (months)
For example, if your total amount of money is $25,000 and your total monthly expenses are $5,000, then you divide $25,000 by $5,000 and you get 5. This is your wealth number. It means that you could survive for 5 months on the money you have currently available without working.
Now, imagine that you had passive and portfolio income coming in every month that covered your expenses. Then, it wouldn’t matter if you worked a 9-5 job. That number is called your wealth ratio.
Calculate Your Wealth Ratio
One of the lessons my rich dad taught me was the calculation of my wealth ratio. It looks like this:
Passive Income + Portfolio Income / Total Expenses = Wealth Ratio
The goal of calculating your wealth ratio is to have your passive and portfolio income equal or exceed your total expenses. This would mean you could quit your job (ordinary-income source) and still maintain your lifestyle. Once your passive and portfolio income exceeds your expenses, the ratio would be one or higher, and you would be out of the Rat Race. This is the goal of playing my CASHFLOW board game that teaches you how to create passive and portfolio income.
An example would be:
$600 Passive + $200 Portfolio / $4,000 in total expenses = .20 wealth ratio
If rich dad had seen this ratio of 0.2, which means that passive and portfolio income equal 20 percent of expenses, he would have had a strong talking to me about working harder to increase my passive or portfolio income. As rich dad said, “The moment you make passive income and portfolio income a part of your life, your life will change. Those words will become flesh.” To him, the more I really knew what passive and portfolio income was, my life would change because my reality of life would change.
Rich dad thought the wealth ratio was a very important ratio to know intimately because it was a great indicator of how well you were managing the business of your life. He said, “Most people retire poor simply because they never know what it feels like to have passive or portfolio income actually in their lives. They may know the definition, but they do not have the integrity to make the words a real part of their lives.”
For five years, Kim and I knew what the definitions of the words were, and we knew we wanted it in our lives. But for five years we did not have those two types of income in our lives. Suddenly after the 1987 stock-market crash and the seven-year recession that followed, we knew that the window of opportunity had arrived. It was our time to make the words real. It was time to have a wealth ratio that was more than zero. We bought our first property in 1989 and, by 1994, we had a little over $10,000 in passive income a month and our total expenses were less than $3,000 a month. That gave us a wealth ratio of 3.3. Today, our wealth ratio is over 12, even though our expenses have gone up significantly.
Editor, Rich Dad Poor Dad Daily