A simple guide to net worth

I've written about net worth twice before: "Your network equals your net worth" about growing and nurturing your network for success and "Build Your Wealth: Graduate from a Paycheck Mentality to a Net Worth Mentality" which is more in line with what I'm going to talk about today.

So, what is net worth and why is it important? In simplest terms your net worth is what you own minus what you owe. Add up all your assets...home, car, furniture, computers, savings, stocks, bonds, a business if you have one. And then subtract the balance (not your monthly payments) of your mortgage, car loan, student loan, credit cards, etc. The amount left over is your net worth.

But is your home or car really an asset? Not according to Robert Kiyosaki (author of "Rich Dad, Poor Dad"):

Your financial planner, real estate agent, and accountant all call your house an asset. But in reality, an asset is only something that puts money in your pocket. If you have a house that you rent out to tenants, then it’s an asset. If you have a house, paid for or not, that you live in, then it can’t be an asset. Instead of putting money in your pocket, it takes money out of your pocket. That is the simple definition of a liability. 

This is doubly true if you don’t own your home yet. Then it’s the bank’s asset, and it is working for them, but it’s not earning you anything.

This applies to your car, too, unless you drive for Uber or Lyft, then it's putting money in your pocket.

Using this definition, only things like stocks, bonds, savings, rental real estate and businesses are assets...but all of those liabilities are still liabilities, including your mortgage and car payment.

I don't know if I agree that an asset is only something that puts money in your pocket, I think an asset is something that has value. I'll leave it up to you to decide which definition you want to use.

There are three kinds of wealth: asset, equity and cash. Asset is the easiest to obtain...you just have to own something, it doesn't matter how much you owe on it. To be an asset millionaire you just have to own a million dollars worth of assets. Equity wealth is the same as net worth wealth...your net worth is your equity, although equity is used more in business than personal life. So an equity millionaire owns a million dollars more in assets than they owe. The third, and best, kind of wealth is cash wealth. A cash millionaire has a million dollars in cash, or cash equivalents such as bonds, notes, T-bills, etc.

Ideally, you'll want to get to the point where your assets provide enough money for you to live on. The best definition of wealth I've seen is:

The definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living. 

For example, if your monthly expenses are $5,000 and you have $20,000 in savings, your wealth is approximately four months or 120 days. 

Wealth is measured in time, not dollars. - Robert Kiyosaki

The majority of Americans are one paycheck away from financial ruin...so, most have a month or less of wealth! If your assets provide 100% of the money that you need to live on, then you are financially independent.

One way to measure how well you're doing is by a ratio called the Return on Net Worth (RON), which is your household income divided by your net worth. It appears to use your gross income in this example:

While reading Thomas Stanley’s Millionaire Women Next Door, I came across something called the RON or Return on Net Worth. It’s calculated by dividing one’s household income by their net worth (assets – minus liabilities). The formula looks like this:

RON = Household Income ÷ Household Net Worth

The book gives an example of a woman who makes $125,000 per year and has a net worth of $690,000. Her RON would be calculated as follows:

RON = $125,000 ÷ $690,000

RON = .1812 or 18.12%

Is that good or bad? Yes. That just means that it depends on her age and her financial needs. Another measure, which is just a simple rule of thumb, states:

Have you ever wondered if you were “wealthy?” There is a rule-of-thumb formula used in The Millionaire Next Door for determining whether or not you are wealthy. For those who are interested, their simple formula is:

Multiply your age by your pretax income from all sources (except inheritances).

Divide that number by 10 to arrive at what your net worth should be.

So, if you are 35 years old and your household income is 60,000 per year, your networth should be $210,000 [(35 X $60,000)/10 = $210,000] in order for you to be considered wealthy.

So, if our mystery woman was 50 years old and making $125,000 she should have $625,000 in assets and she actually has $690,000 so she seems to be doing fairly well.

The numbers in that rule of thumb are way off if you're young, but if you're in your 50's and 60's you can get a rough idea of where you stand. And it looks like it's probably including home equity. So, in the 30 years that she's probably been working, she's acquired an average of $23,000 per year in combined savings, investments and home equity.

How are you doing in the net worth department? Do you need to ramp it up a little? One of the best ways to build a passive income, one that you don't have to work for, and to build your net worth is by building a network marketing business. Email me if you'd like to find out more.

Interesting days

Today - iPod Day, Mole Day, TV Talk Show Host Day and Boston Cream Pie Day

Tomorrow - World Tripe Day and United Nations Day

Next Monday - Candy Corn Day, Create A Great Funeral Day and Checklist Day

November 23 - Fibonacci Day