Three Numbers That Build Wealth

Do you want to be Rich, or do you want to be Wealthy?

I personally never thought about the difference between the two until recently, when I saw this quote from Robert Kiyosaki (author of Rich Dad, Poor Dad):

“Many people think that being rich and being wealthy are the same thing,” said rich dad. “But there is a difference between the two: The rich have lots of money but the wealthy don’t worry about money.”

The wealthy don’t worry about money because they have enough of it to fund their lifestyle without needing to earn more.  The rich, on the other hand, can have more money but need to keep earning money to fund their lifestyle.  As Kiyosaki later concludes, “Wealth is measured in time, not dollars”.

Wealth Building – The Numbers

Most of what you probably read about personal finance, especially as you get into more specific topics, involves a litany of numbers – interest rates, percentages, incomes, expenditures, etc.  In my opinion there’s really only a few numbers you need to know – I call these Wealth Builders.  Wealth Builders reveal what resources you have to grow your wealth and can help you create a blueprint for the rest of your life (which, like Wealth, is measured in time, not dollars).

Net Worth

Technically, figuring out your net worth is easy.  Just take all of your assets (checking, savings, 401k, house equity, and excluding things like cars, furniture, and electronics) and subtract your liabilities (student loans, credit card debt, mortgage) and you’re left with a number that not only sums up your financial picture, but is measurable and can be tracked over time.

Emotionally, net worth can be difficult.  Numbers don’t lie (for the most part), and if you’re net worth is negative you simply have a lot of work to do.  I personally ignored most of my student loans for several years – even making my monthly payments the sum was so large it felt too overwhelming to think about.  After a couple years of including everything in my net worth I’ve made more progress on my debt than the previous 5 years combined.

Real Hourly Wage

While I suspect most people are familiar with the concept of net worth (even if they personally don’t know their own number), the Real Hourly Wage is less common but I think just as important.

For most people, their only (or primary) source of income is from their job.  And that’s okay, you just need to understand how much that resource actually impacts your finances.

To start, think of what you make at your job now.  If you’re salary, you probably still have an hourly wage printed on your paychecks.  If not, just divide by 52 (weeks in the year, including paid vacation) and then again by 40 (as you’re likely based on 40 hours a week, even if you work more).

Most people consider this “what they make”.  Further along some people focus on their take home pay after taxes, insurance, etc.

The problem is that both of these numbers are still wrong.  One’s a little less wrong, but still wrong.

Below are the steps to figure out your Real Hourly Wage:

  1. Tally up ALL hours you spend related to your job.  Even if you’re paid for 40, how many do you work?  Add in time spent commuting, getting ready in the morning, working from home, buying clothes for work, decompressing when you get home.  Figure out the total hours a week you actually dedicate to your job.
  2. Think about expenses that you have that you wouldn’t if you didn’t have to work – things like lunches out, transportation costs, clothes, daycare, petsitting, and outsourced household tasks and repairs, health expenses due to stress, lack of sleep, etc.  Add up these extra expenses for one week.  Multiply by 50.
  3. Figure out your yearly NET income.  Find your take home pay on your most recent paycheck, add in any contributions to 401k or other tax-deferred accounts, and multiply by how many paychecks you get a year.  Don’t add in taxes.  If health insurance is subsidized by your employer, consider subtracting some of that out of your net pay.
  4. Subtract the extra expenses you totaled up in step 2.
  5. Divide by 52.
  6. Finally, divide again by the hours you came up with in step 1 (which should be more than 40).  This is your Real Hourly Wage.

I’m willing to bet your RHW is between 25-50% less than what you thought you were making.

I’ll give you a moment to let that sink in..

Spending/Savings Rate

Finally we have your Spending/Savings Rate.  I put these two together because they’re two sides of the same coin.  However, I do think in the beginning figuring out your Spending Rate can be easier and more effective than calculating your Savings Rate.

Your Spending Rate (you can learn more about why I love this number here) is simply the money that leaves your accounts divided by how much money went into your accounts.  The reason this number is important is it shows you how you’re allocating your resources – if you’re spending 95% of what you make, that means that 95% of your workweek is dedicated to surviving today.

What Now?

To recap, these numbers tell you

  • where you are (Net Worth),
  • what resources you have to get to where you want to go (Real Hourly Wage), and
  • how you’re currently using those resources (Spending/Savings Rate).

These numbers will paint you a clearer financial picture than spending hours with an advisor will.  They will make you more informed about your financial health than nearly everyone else around you.  The confidence from getting this knowledge on your own will make whatever financial decision you want to make next easier, less complicated and more empowering.

Finally, they can help you build a roadmap towards real, lasting security and happiness.  They can help you build the life you want.

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