What is wealth?
Wealth can be defined in a wide variety of ways including having lots of money/high net worth, have quality time with family and loved ones, good health, etc. What is your definition of wealth? Someone who has high end sports cars, someone who has all the latest technological items, or someone with a large house?
Let’s look at a commonly viewed definition of wealth and that is net worth. Bill Gates has a net worth of around $80 billion dollars. How did he develop such a large net worth? He took an idea and developed a company around it. He saw a niche or a group of people that could benefit from his product. At the time his niche did not have a lot of competition which helped his idea take off.
What is net worth?
Net worth is assets minus your liabilities. So to accumulate wealth given the definition of net worth one must increase their assets and decrease their liabilities.
Assets are things that increase your income and include:
- Real estate
- Intellectual property
Liabilities are things that decrease your income and include:
- Consumer/student loans
- Credit Card debt
I did not include a home/mortgage in either of the lists above. There a different views of whether or not it should be included in ones net worth. Robert T. Kiyosaki author of Rich Dad Poor Dad would argue that to the poor dad it is a asset while to the Rich dad it is a liability. A mortgage takes away a percentage of your income each month that you could be putting towards other assets to have your money work for you. The more expensive your home mortgage the harder you have to work to save the same amount of money for your assets. If you make more money you will pay more taxes and it may push you into a higher tax bracket. While a mortgage does provide a tax write off it does add increased expense with property taxes, repairs to the house as it ages, etc. All these expenses are paid with after tax income. Also homes can lose value as we saw when the housing bubble broke in 2007.
Definition of wealth may vary depending on income…
A book that I recommend you read is The Millionaire Next Door by Thomas J Stanley and William D. Danko. This book has an interesting formula in it that takes into account ones income, how old they are to determine their wealth.
“Multiple your age times your recent pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”
An example would be if you make $30,000 a year pretax and are 40 years old:
- (30,000 x 40)/10 = $120,000
This means that to be wealthy this 40 year old should have a net worth of at least $120,000
How is your accumulation of wealth doing based off this formulate? Are you devoting enough of your income to build up your assets
My answer at the time of writing this would be that I am not wealthy based off this formula. I did not expect to be at this point in my life. I finished my training and school at around the age of 29 so I have some catching up to do. The formula does provide a great litmus test to see how you are doing on your journey to wealth accumulation. Do you need to put more of your income to build up your assets and have your money work for you?
Your other choice to build more wealth is to increase your income. However, if you already are not saving enough money as it is you run the risk of increasing your lifestyle instead of increasing your net worth. Accumulating more material things. Be careful with increasing your lifestyle as your annual pretax income increase. Also remember that you will have to pay more taxes and the increased income may put you into a higher tax bracket.
Pay off your loans and debts…
Start with your highest interest rate loans and pay these off first. This should be at the top of your priorities on your journey to accumulate wealth and passive income. Once they are paid off be weary of accumulating more debt. Only do that if it is a necessity or a way to purchase a positive cash flow producing asset with good return on investment.
Look for ways to start passive income producing assets now…
Even if you have loans and debts to payoff that does not mean you have to wait to accumulate debt producing assets. Look for assets that are inexpensive to start or assets that are projected long term to accumulate wealth at a higher percentage than your debts and loans.
Intellectual property is a perfect way to start off if you do not have thousands of dollars to invest in an income producing asset. If you have not reviewed my get started page please do so now. You can start today with an idea, and interest, a passion and produce your online business that can produce a source of passive income.
Start your free training at Wealthy Affiliate today.
Please drop a comment below with questions, suggestions, and if need help getting started.
Your Passive Income Advisor