How long would you survive if you stopped working today?
This can be a scary question for some millennials since the answer could be weeks or months. I personally wouldn’t be able to survive without a job for no more than half a year. The wealthy, however, can live 10-20 years or even the rest of their lives without ever working again.
As I’m reading “The Millionaire Next Door”, I’m gaining a new perspective on what it means to be wealthy. No, this isn’t a book review but I figured I share what I’ve learned so far with all of you.
Being wealthy means you have to become frugal with most items that aren’t assets. This means spending less on Macy’s and investing more towards your investment portfolio. Americans are a high consuming society for the most part, and millennials are now a big portion.
Mainly because we are now dominating the majority of the workforce.
It’s fairly common to know a friend or family member who recently purchased a new vehicle, home, or brand new shoes. We love to spend our money! If you want to become wealthy, your spending habits need to change.
Calculating your net worth
With no goal, there’s no way to know if you’re on track to becoming wealthy. This is why knowing your net worth is crucial when it comes to building your wealth. You can use the following formula that’s discussed in the book “Millionaire Next Door” to calculate this.
Net worth is used here as a way to determine how much money you should have accumulated based on your age and income bracket. Achieving this number is important because you can leverage your money to work for you.
The formula is as follows: Age X Your income (before taxes) + all other assets /10
For example, 25 X $60,000 + $15,000 (other assets) / 10 = $187,500
In the scenario above if you’re 25 earning $60K a year with $15K in other assets, you should have $187,500 saved up. This is a lot of cash! This number is unrealistic in my onion, but it can be used as a reference point.
What does it mean to become wealthy?
Often times being rich and wealthy are synonymously used, but here are some key differences between the two. Rich people only have a lot of money, while wealthy people understand how to make a lot of money. The rich are motivated by money, while the wealthy are motivated by their passions.
Which are you?
After calculating your net worth you’re probably scratching your head on how you’ll accumulate this much cash. Unless you’ve inherited wealth, or have saved money since you were 12 years old, chances are you don’t have this much money saved up.
A more realistic approach is to calculate on average how much you spend each month. The expenses you’ll want to calculate are the ones that are truly necessary. (i.e. electric, food, etc.) Next, you’ll want to multiply It by the number of years you’d like to live off your money.
For example, if you spend on average $2000 a month you would then multiply this by 24 (months). The total would be $48,000. Now, this number seems more achievable! You can also multiply your monthly expenses by 10%-15% to give you some extra cushion room for other expenses.
You now have 2 different ways to calculate your net worth. While the first formula seems a little bizarre, but the second one proves to be more realistic. I wanted to share this from the book that I’m currently reading “Millionaire Next Door” since it caught my attention.
Many times we are determined to make more money, but we never stop and think how much is actually enough. We have to become experts at managing the money we currently have before we can manage millions.
I hope that you’ve gained a different perspective on what it means to become wealthy. I personally have decided to become wealthy instead of being rich. However, just wanting to be wealthy isn’t enough, which is why I’m educating myself on this subject daily.
Most people will go on for the rest of their lives without knowing their net worth.
You may have already a decent amount of money saved up, or after reading this post you might decide to start saving.
Remember what separates the rich from the wealthy is knowledge, not money. By now you should know the amount of money you’ll need to start becoming wealthy. It doesn’t have to be perfect, but if you need a goal to work towards to.
Instead of just saving cash, invest in and make it work for you.
Life is too short to only live to work.
I have written down my net worth, and the amount of money I need to earn each month to become financially independent, and I’m determined to work until I’ve achieved this goal.