There is a common misconception that goes around and that is, if you earn a lot of money then you are wealthy.
And it is easy to understand why this train of thought exists because income is THE BEST tool we have for wealth creation. However, income itself is not what makes us wealthy, it is what we do with that income that does.
If you spend all your income on lavish dinners, fancy clothes and fast cars then you can’t consider yourself wealthy. Sure, you have probably had some pretty cool life experiences, but in a financial sense – you are not wealthy.
The true measure of wealth is your net asset position. That is, your assets minus your liabilities, and the reason why this is the true measure of wealth is because it is your net asset position that will give you financial freedom.
Financial freedom comes when you have the ability to meet your desired standard of living with the wealth that you have accumulated. You are not tied down to a set schedule or location, you have the freedom to be where you want and do what you want all while still living the lifestyle you choose.
If you have not yet accumulated sufficient assets to meet financial freedom then you are reliant on your earned income. This requires you to input your time, skill and expertise in order to earn it. If you are reliant on earned income, you are not truly free as you have commitments to meet in order fund your lifestyle, whether you like it or not.
Also, earned income has a lifespan – you can’t work forever. However, net assets can continue on indefinitely. The only way you can lose an asset is if you sell it and spend the proceeds on consumption or if you invest it poorly and lose your capital.
Now all of this is not to say that your level of income is not important. As I said earlier, income is your best wealth creation tool. You need your income to build your net asset position. That’s why I am an advocate of investing in yourself and building your income through education, training and experience because this is a very valuable thing to do.
There are two ways that you can use your earned income to create net assets and that is to either invest or pay down debt. Both boost net assets and both are equally important. Don’t think that if you own 20 properties, all with huge mortgages, that you are wealthy either. You are ignoring the debt side of the ledger and your net asset position will still be poor.
As your net assets are your true measure of wealth it is so important that you track your net assets on a regular basis. This is very easy to do. Simply keep a running ledger of all your assets and liabilities and make sure they are improving over time.
If you want a template to track your net assets, head over to my website and download the Wealth Tracker spreadsheet. This is free to download and helps you not only track net assets but is also a budgeting tool.
When tracking your net assets, only include financial assets. In order to be classified as an asset it should have the ability to either generate income for you or increase in value over time. This includes things like shares, property, super, cash, bonds, business, etc. It does not include cars, electronics, jewelry, white goods, etc.
In my days as an adviser I have worked with people who earns $400,000 plus and have nothing to show for it. I have also worked with people who earn $80,000 and have a multimillion-dollar net asset position. On the surface it would be easy to assume that the $400k+ person is rich the rich one but a quick look under the bonnet tells the true story.
Always remember, you can’t out earn a bad budget. Mike Tyson proved this after earning $400 million in his career as a professional boxed before filing for bankruptcy. So use your income wisely to build your net asset position and see your wealth last generations.
