We are talking about money and wealth, but how do we measure wealth? Some people think they are wealthy because they earn a good salary. Your SALARY is NOT wealth, it is income and if you use it productively, it could help you to get wealthy.
But, while we are on the topic of salary, I think your biggest wealth is your health and your ability to generate an income. That is ultimately what enables you to become financially wealthy. That means you must protect your health and insure your ability!
From an accounting perspective, you might want to calculate your wealth in terms of net asset value. You do that by adding the value of all your assets and deducting all your debt. If your assets are worth more than your debt, then you are wealthy by that amount. It is not a bad indicator, but in a scenario like this, you will also add your home, car and golf clubs. How realistic is that?
I prefer another method, because I think it relates to real life. If you would lose your salary today, how many months can you maintain yourself financially before you will have nothing left? That is real life, because people are retrenched and we must live.
To calculate this, look at your expenses and write down what you have to spend every month. Let’s say R10 000. Now look at all your financial resources – do you earn interest and dividends and rent? That is income that you deduct from the R10 000. Let’s say you still need R8 000 per month. How many months can you survive with the cash resources you have (without borrowing) before you start selling golf clubs, cars and the home?
The number of months you can survive, is an indication of your wealth! And you are only really wealthy when you have sufficient resources to survive the rest of your life.
So calculate your wealth right now!
Tomorrow I will discuss how this way of measuring wealth is an argument in favour of property investments.