Do you know how 401k matching works? You want 50% or 100% returns? It’s easier than you think, if you know how to work the job benefits properly. Unsure how this all works? Read.
Are You Destined to be Rich? Here’s the Best Way to Find Out
Earlier this month, the New York Times posted a quiz on its website to help you figure out if you’re actually rich, but you just didn’t realize it. The quiz tells you whether or not you’re rich based on your income, where you live and what being “rich” means to you.
It’s quick and fun… but it’s completely misleading.
This idea excludes the fact that income is not the only or even the primary measurement of a person’s wealth. (To be fair, the NYT quiz acknowledges there are other factors to consider on the results page.)
This is a persistent, even harmful myth.
A High Income Isn't Enough
Here’s a simple illustration: Imagine a woman named Lisa gets a new job with a 50% pay increase, what’s the first thing most people do? She increases her spending by (at least) 50%, of course!
At the end of the year, Lisa has nicer clothes, a newer car and more pictures of fancy meals on her Instagram. But she probably doesn’t have much more money in the savings account. She hasn’t invested in any assets that will increase in value. And if Lisa loses their job unexpectedly, she’s just as unprepared as she would have been if she was still making her old salary. If we’re being realistic, she may be in even worse shape because her car note is more expensive!
How much money you make isn’t what really matters. What matters is how much money you keep — and grow.
Here’s another illustration: Let’s imagine Gwen. Her income is average, but she consistently puts a portion of her paycheck to the side to save or invest.
Over the years, Gwen saves up an emergency fund — cash she can use if life throws her a curveball. She funds her retirement accounts so that she can be confident she won’t have to work until she’s 80 years old. And she even pays off her house ahead of schedule.
Who would you say is richer, Lisa or Gwen?
Her Instagram may be less glitzy, Gwen is the wealthier woman. She owns her home. She has money in the bank and a healthy 401(k). Lisa may not have any wealth at all. She doesn’t really own.
These illustrations are oversimplified, but they help us visualize and understand why income does not equal wealth. Income can lead to wealth, but it doesn’t always. According to a recent Nielsen study, one in four Americans who earn $150,000/year or more are living paycheck to paycheck.
In other words, focusing on your income can keep you broke.
Net Worth is the Key
If you really want to be rich (or at least richer), you should be focused on your net worth.
Your net worth is pretty simple to figure out. It’s your assets minus liabilities. The things you own that are worth money (cash reserves, stock portfolio, real estate) minus the things that cost you money (debts and expenses).
Wealthy people tend to obsess more over their net worth — their ranking on the Forbes 400 list, if you will — much more than their income. In her book “The Next Millionaire Next Door,” Stanley Fallaw found that income only makes up 8.2% of the average millionaire’s net worth. But you don’t have to be wealthy in the eyes of the world to benefit from intentionally working on your net worth.
Can you bear one more illustration?
Let’s talk about Serena. She has an average salary at work, but she saves aggressively so she can buy income-producing assets like real estate and dividend stocks. Her sacrifice pays off because within a number of years, she may be able to totally replace her employment income with the passive income generated by her investments.
Let’s say she’s bringing in $4,000 a month from those investments and her monthly expenses are just $3,000. She doesn’t have to work if she doesn’t want to, and she’s still able to save or invest $1,000 every month.
That’s what wealth looks like.
Do you know your net worth? YOU SHOULD.
Check out this net worth calculator today and find out how you’re doing.
And reach out to a financial advisor. if you’d like some guidance on what might be the right way for you to improve your personal net worth.
Freeman Capital Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.