The true definition of wealth
Before seeking to create more wealth, we must first know what wealth really means. When I asked others what is the definition of high networth individuals, the answers I got shocked me for a while. Generally, many people think that a person’s wealth is defined by how much he earns. Some think that it is defined by the house he lives in and by the way he lives. Obviously, people still think that the more a person earns, the richer he is. This is not true at all. If a person can earn well, but is not able to manage the money well, not much wealth can be maintained with the person.
A person’s wealth is actually defined by how long a period of time he / she can sustain their lifestyle if they stop working. The longer one can go on living his / her life without working, the richer the person is. Therefore, wealth is defined by 3 things
- the monthly expenses: the lower the monthly expenses, the better wealth one can attain
- the liquid assets: liquid assets refer to how much cash or liquid investments such as stocks, bonds and fixed deposits
- the passive income: passive income is the income that one will receive even after he / she stops working. Example of this include interest from savings or bonds, royalties payment, stock dividends, property rental income and regular profits from a business.
2 examples here.
Albert who is earning RM 20,000 a month as a high management executive director in a multi-national company. However, his monthly expenses are RM 18,000 per month due to his luxurious lifestyle. Because of this, he is saving roughly RM 2,000 per month. Due to his lifestyle, he is upgrading his car every now and then and spend money to repair / upgrade his house as well. Not much money left even after working for 5 years. So, if he stops working, his available cash / investment is only his last month salary, i.e. RM 20,000. He cannot survive without working after 1 month.
Sue, on the other hand, is a senior executive in a small company. She earns RM 5,000 a month. She spends 80% and save 20%, i.e. saving of RM 1,000/month. She invests the saving into paper assets which gives her 8% return per year. She is also silently building up e-commerce business while working full time, she is able to get passive income of RM 3,000 per month after 5 years. Her investment turns RM 73,000. If she stops working today, she continues to receive RM 3,000 per month from her e-commerce business and she has RM 73,000 from her savings / investments. She can sustain 73 months without worrying. Hence, Sue is much more wealthier than Albert.
Why 73 months? This is the formula.
| Level of wealth (number of months can sustain without working) = Liquid asset ÷ (Monthly expenses – monthly passive income) |
You can start monitoring your wealth using the formula above and start improving your wealth now. From the above example, I hope you can see how much one earns does not define how wealthy one is. Do not chase having more income alone. Learn how to manage your money better so that you can improve your wealth better.
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