Before you can be truly wealthy, you must first know what wealth really means. Again, many people think that a person’s wealth is defined by how much he earns, by the clothes he wears, by the house he lives in and by the way he lives. We now know that this is not at all true.
A person’s wealth is actually defined by how long a period of time he/she can sustain their lifestyle if they stop working. The longer you can go on living your life without working another day, the richer you actually are. Your wealth is therefore defined by three things: 1) your monthly expenses, 2) your liquid assets and 3) your passive income.
Your liquid assets refer to how much cash or cash equivalents (like stocks, bonds & fixed deposits) you have to pay for your monthly expenses. Your passive income refers to income that you will continue to receive even after you stop working. This could include interest, dividends, royalties and profits from a business.
Let’s look at an example. Steve is a director in a multi-national company and earns a $20,000 monthly salary.
He lives a lavish lifestyle that results in personal and household expenses a month of $18,000. He hasn’t really saved much over the years as he has spent any surplus upgrading his house and car. His liquid assets are just under $18,000. Besides his full time job, he has no other sources of income. What is Steve’s level of wealth?
Well, if he stops working today, his $18,000 will last him for just a month. So his wealth is one month’s salary. As you can see, wealth is defined not by the absolute amount of dollars, but by time.
On the other hand, Susan, a marketing manager in a retail store earns a monthly salary of $5,000 a month but she is much wealthier than Steve. How is this so?
Well, over the last 20 years, Susan has diligently saved 20% of her income and invested it in the right stocks and mutual funds that have given her returns of 15% per year. (You are going to learn how to achieve this return with minimal risk in the later chapters).
Over the years, Susan’s liquid assets have grown to $1.32 million (you can verify this with a financial calculator).
In addition, she has spent her free time building up a home-based business that sells unique collectibles over the Internet. Her small business earns her an additional income of $1300 a month. She may not drive a fancy car or wear a Cartier watch, but let’s see what her wealth is.
If Susan were to stop working today, she would still retain the $1,300 monthly passive income that her home-based business earns her. Since her monthly expenses total $4,000 a month (80% of her income), she would have a net outflow of $3,700 a month.
With her $1.32 million in accumulated savings, she would be able to survive for 30 years! (This is assuming that she does not invest the $1.32 million she has prudently saved up!).
If Susan were to put her $1.32 million into a risk-free fixed deposit account earning interest of 4%, it would bring her an additional interest of $52,800 per annum.
This means another source of passive income that rakes in $4,400 a month. So you can see how Susan can very comfortably go on forever without working another day in her life!
Can you now see that your wealth (i.e net worth) is not determined by how much you earn, rather, it is determined by how much you save and wisely invest. Even with just a middle class income, you could become a millionaire if you have enough financial intelligence, discipline and patience.
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE audio CD program ‘7 Steps To Financial Freedom’ here.