Wealth File #13 – Focus On Your Net Worth

Rich people “focus on their net worth.”
Poor people “focus on their working income.”

When it comes to money, the common question that people ask is “How much do you make?” The question “What is your net worth?” is only very rarely heard. A small number of people talk this way, except for the ones hanging out at the country club.

Most of the time, the center of the financial conversation in country clubs is net worth: “Jim just sold his stock options; he’s worth over three million. Paul’s company just went public; he’s worth eight million. Sue just sold her business; she’s now worth twelve million.” You will never hear this statement at the country club, “Hey, did you hear that Joe got a raise? Yeah, a two percent cost-of-living allowance to boot.” But, if you did, then probably that is a guest for the day speaking.

Wealth is measured by net worth and not by working income. It has always been like that and always will be. To find out your net worth, all you have to do is add up the value of everything you own, along with your cash and investments like stocks, bonds, real estate, the present value of your business if you have one, as well as the value of your residence if it is your own, and then subtract everything you owe after that. Net worth is considered the ultimate measure of wealth because, if required, what you own can be turned into cash.

Rich people know the big difference between working income and net worth. Working income is significant, but it is only one of the four factors needed to know your net worth. The four net worth factors include:

1. Income
2. Savings
3. Investments
4. Simplification

Rich people are aware that building a high net worth is an equation that have all the four elements. Due to the importance of these factors, let’s study each one. Income comes in the form of working income and passive income. Working income is the money you get from active work. Common examples are a paycheck from a day-to-day job or an entrepreneur’s profits or income taken from a business.

Working income needs you to put in your own time and labor to make money. It is important because, if working income is lacking, the three net worth factors may not be addressed.

Working income is the way we fill up our financial “funnel”. If all things are equal, you will earn more working income, the more you can save and invest as well. Although working income is important, as mentioned earlier, it is only a portion of the whole net worth equation.

Unfortunately, most poor and middle-class people only think about working income, out of the four factors. As a result, they get a low or no net worth.

Passive income is money earned without you actively working. We will tackle passive income in more detail later, but at this point, think of it as another stream of income filling up the funnel, which in turn can be used for spending, saving, and investing.

Source: Secrets of the Millionaire Mind, T. Harv Eker © 2003

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