How To Measure Your Wealth Number
If you stopped working today, how long could you survive financially?
If your answer is only a couple of months, sadly you’re not alone. According to a report from Bankrate, the typical American household has an average of $8,863 in an account at a bank or credit union.
And even worse, 23 percent have no savings at all.
I’m sure you can see why I asked this critical question—it’s one that most people will never stop to calculate. Perhaps that’s because they feel invincible. Or maybe because it’s just too darn scary.
But this is why, when the unexpected happens—like a job layoff, an illness, a divorce, or a global pandemic that forces millions out of work—so many people are not prepared.
This also illustrates why so many people are struggling in our current economy. It’s at the time of the unexpected event that most people, for the first time, are forced to face the truth of where they are and how long they can survive financially. And that’s the exact moment where you will be faced with the cold hard truth of your situation.
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.
Rather than focus on the word saving, we focused on the word debt and used debt to acquire assets.
What Do You Need To Live On?
Most people calculate what they want and need in terms of money.
“I need $1 million to live on for the rest of my life.” When you talk with financial planners, they talk to you about your nest egg and how much money you will have to set aside to retire. They’ll also talk in terms of your “net worth,” or the value of assets you own minus the liabilities you owe.
However, there is a better way to answer the question.
I firmly believe that a person’s net worth is a worthless way to define wealth. Instead of measuring your wealth in terms of money, it’s better to measure your wealth in terms of time—what I call the Wealth Number.
First, let’s look at some common terminology. The terms “rich” and “wealthy” are usually used interchangeably. However, my rich dad made an important distinction between the two, saying,
“Rich is measured in money and wealth is measured in time. Most people focus on getting rich rather than becoming wealthy.”
Dr. R. Buckminster Fuller, a world-renowned architect, futurist, inventor, and visionary, also measured wealth in time. He defined wealth as a person’s ability to survive X number of days forward.
Answering how much you need to live on can be answered by asking yourself, how much is the time with your children worth? Or time you spend with your spouse? Or time you spend volunteering? The more wealth you have, the more time you have and the more freedom you have.
The Two-Part Question To Discover Your Wealth Number
In terms of discovering your Wealth Number, there are two important parts to the question, “If you stopped working today, how long could you survive financially?”
- If you stopped working today…
That means there are no more paychecks coming your way. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.
- How long could you survive financially?
We’re talking about survival at your current standard of living, not if you downsized your house, sold your car and rode the bus, stopped eating out, and so forth. Given your current level of expenses, how long would your money last?
A couple of years ago, I was meeting some friends at a beachside restaurant in Honolulu. I took a seat at the bar to wait for them and began talking with the gentleman sitting next to me. He and his wife had both recently retired and they were living their dream of retiring on the islands. They bought a house on the island of Kauai and were on their way to their new life in a few days. How exciting!
We had not discussed money, retirement, or the economy, yet out of the blue, this man said to me, “I am just a bit concerned.”
Uh oh. That’s not the attitude you should have when starting the next chapter of your life.
I asked him what he was concerned about, and he told me, “My wife and I have looked forward to our dream retirement for many years and now here we are. My worry is that we may not have put aside enough money to last through our retirement. I guess time will tell.”
There was sadness in his voice.
This man, after a lifetime of working hard towards his goal of he and his wife living and retiring in Hawaii, was already worried before they had even begun. He was already fearful of running out of money.
That is not a way to live out the years that are supposed to be your reward for a lifetime of hard work.
Do The Math
For our purposes in calculating your Wealth Number, your money consists of your savings, CDs, retirement accounts, liquid stocks (stocks you could sell today), physical gold and silver you have in your possession—it can include anything that can be converted into cash today.
It does not include selling your jewelry, your furniture, or your second car, for example, because that would lower your current standard of living. It does include cash flow from dividends, rental real estate, and other investments that produce income without your effort.
You’ll also need to determine what your monthly expenses are.
Note: It’s easy to lie to yourself about how much you actually spend on monthly expenses—so pull out your bank and credit card statements and look at the average costs of everything over the last three months. Be sure to include all your expenses, because you want to expand your financial means to meet the lifestyle you desire, not live below that lifestyle.
Even if you have done this calculation for yourself before, then I encourage you to do it again now. Why? Your finances are dynamic; they are continually changing. You may come up with a similar answer, or you may be surprised by your new outcome.
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.
Here’s the formula:
Your available money / Your monthly expenses = your wealth number
Once you do the math and divide how much money you have available by your monthly expenses, you end up with your wealth number. What does that mean? Your Wealth Number is measured in time—in this case, in 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.
So if your Wealth Number is 24, that means 24 months. If your number is 6, that equates to 6 months. So, this calculation will reveal the exact number of months you could survive if you (or both you and your partner) stopped working today.
So, what’s your number?
Welcome To Reality
For most people, this calculation is sobering. It brings you and your money face to face. It is the most realistic and telling demonstration of exactly where you stand today financially.
For a lot of people, their Wealth Number is 3 or less. That means they could only survive without paychecks for three months or less. They are living paycheck to paycheck. Some actually have a negative number, which means they are spending more every month than they are bringing in.
It really doesn’t matter what your number is. Your number is simply your number. You don’t need to make it right or wrong or continually stress over it. It is what it is. Period.
Now you know something that most people will never take the time to figure out. And most importantly, now that you know, you can take action and change it if you choose.
Most people are only familiar with capital gains investing—buying something at a low price, selling it at a higher price, and pocketing the difference. In other words, they are focused on trying to get rich.
When you focus on investing for cash flow, you are focused on building your wealth, creating passive income that earns you money without depleting or selling the original asset.
So, take a look at your finances. If you are unhappy, or even upset and sad, about that number in front of you—that’s okay. That just means it’s time to take some action.
Editor, Rich Dad Poor Dad Daily