Net Worth is the most common way of calculating how much money we have. However, that single number is limited in its usefulness because what may be a high Net Worth for one family may be a low Net Worth for another. This is why Net Worth must be considered in the context of our lives. When we do this, we measure something more valuable than the amount of money we have, and that is the amount of time we have. After all, what good is money if it can’t support our lifestyle for very long? That is why I define True Wealth as the total numbers years of expenses you have saved. The calculation is:
Net Worth / Yearly Expenses
Let’s put this concept into action and pretend you have $1 million Net Worth, and are faced with two different scenarios:
Scenario A: let’s say you spend $500,000 per year. How long would $1 million last you
Answer: $1,000,000/$500,000 = 2 years
Scenario B: let’s say you spend $100,000 per year. How long would $1 million last you?
Answer: $1,000,000/$100,000 = 10 years
Provided that you could live happy and healthy spending $500,000 or $100,000 a year, which scenario would you rather be in? The answer should be very obvious. Scenario B, of course. That is because the money will LAST FIVE TIMES LONGER!
When your amount of True Wealth is low, it leaves you financially vulnerable since there is not a large enough gap between your Net Worth and your expenses. If your amount of True Wealth gets high enough, you will reach Financial Independence and have the ability to retire if you choose.
Net Worth in Context of YOUR Life
In the example below, the Net Worth of each of the households varies greatly. However, that number can be very misleading without taking into account yearly expenses.
ALL 3 HOUSEHOLDS HAVE THE SAME AMOUNT OF TRUE WEALTH: 25 YEARS
At first glance, most people would compare these different households and immediately say example three is the ‘richest,’ but this thinking is flawed. It is not true! Sure, they might have fancier things, but that is not the measure of True Wealth. The most important thing is that you have enough money to support YOUR lifestyle, not someone else’s. Making that outward comparison is not fair and can only hurt you when you should be focusing on YOUR financial circumstance.