This is a question that could very well make your palms sweat and pulse race: If you (or you and your partner/spouse) stopped working today, when it comes to your wealth how long could you survive financially?
If your answer is only a couple of months, sadly you’re not alone.
According to a report from Bankrate, the typical American household has an average of $8,863 in an account at a bank or credit union. And even worse, 23 percent have no savings at all.
Unfortunately, most people never stop to calculate their wealth number – or they measure it wrong.
Most people calculate what they want and need in terms of money…
“I need $1 million to live on for the rest of my life.”
When you talk with financial planners, they talk to you about your nest egg, how much money you will have to set aside to retire. They’ll also talk in terms of your “net worth,” or the value of assets you own minus the liabilities you owe.
However, there is a better way to answer the question.
Instead of measuring your wealth in terms of money, it’s better to measure your wealth in terms of time — what I call the Wealth Number.
There are two important parts to answering the Wealth Number question…
#1: If You Stopped Working Today…
That means there are no more paychecks coming your way. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.
#2: How Long Could You Survive Financially?
We’re talking about survival at your current standard of living, not if you downsized your house, sold your car and rode the bus, stopped eating out, and so forth. Given your current level of expenses, how long would your money last?
For our purposes in calculating your Wealth Number, your money consists of anything that can be converted into cash today like…
- Your savings
- CDs
- Retirement accounts
- Liquid stocks (stocks you could sell today)
- Physical gold and silver you have in your possession
But it does not include selling your jewelry, your furniture, or your second car, for example, because that would lower your current standard of living. It does include cash flow from dividends, rental real estate, and other investments that produce income without your effort.
You’ll also need to determine what your monthly expenses are.
It’s easy to lie to yourself about how much you actually spend on monthly expenses — so pull out your bank and credit card statements and look at the average costs of everything over the last three months.
Once you know your total monthly expenses and your sum total of money available, you can determine your wealth by dividing your total sum of money available by your monthly expenses.
Here’s the formula:
- Your available money / Your monthly expenses = your wealth number
Once you do the math and divide how much money you have available by your monthly expenses, you end up with your wealth number.
What does that mean? Your Wealth Number is measured in time—in this case, in months.
For example, if your total amount of money is $25,000 and your total monthly expenses are $5,000, then you divide $25,000 by $5,000 and you get 5.
This is your Wealth Number.
It means that you could survive for 5 months on the money you have currently available without working. This calculation will reveal the exact number of months you could survive if you (or both you and your partner) stopped working today.
So, what’s your number?
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Much Success!
Have an outstanding day!!
Sara
[Orignial content source: Robert Kiyosaki, NY Times Best-Selling Author, Rich Dad Poor Dad]