Wealth File #13
Rich people focus on their net worth.
Poor people focus on their working income.
By T Harv Eker
When it comes to money, people in our society typically ask,
“How much do you make?” Seldom do you hear the question “What is your net worth?” Few people talk this way, except
of course at the country club.
In country clubs, the financial discussion almost always
centers around net worth: “Jim just sold his stock options; he’s
worth over three million. Paul’s company just went public; he’s
worth eight million. Sue just sold her business; she’s now
worth twelve million.” At the country club, you’re not going to
hear, “Hey, did you hear that Joe got a raise? Yeah, and a two
percent cost-of-living allowance to boot?” If you did hear that,
you’d know you’re listening to a guest for the day.
The true measure of wealth is net worth, not working income.
Always has been, always will be. Net worth is the financial
value of everything you own. To determine your net
worth, add up the value of everything you own, including your
cash and investments such as stocks, bonds, real estate, the
current value of your business if you own one, the value of
your residence if you own it, and then subtract everything you
owe. Net worth is the ultimate measure of wealth because, if
necessary, what you own can eventually be liquidated into
cash.
Rich people understand the huge distinction between
working income and net worth. Working income is important,
but it is only one of the four factors that determine your net
worth. The four net worth factors are:
- Income
- Savings
- Investments
- Simplification
Rich people understand that building a high net worth is an
equation that contains all four elements. Because all of these
factors are essential, let’s examine each one.
Income comes in two forms: working income and passive
income. Working income is the money earned from active
work. This includes a paycheck from a day-to-day job, or for
an entrepreneur, the profits or income taken from a business.
Working income requires that you are investing your own time
and labor to earn money. Working income is important
because, without it, it is almost impossible to address the other
three net worth factors.
Working income is how we fill up our financial “funnel,” so
to speak. All things being equal, the more working income you
earn, the more you can save and invest. Although working
income is critical, again it is only valuable as a part of the entire
net worth equation.
Unfortunately, poor and many middle-class people focus
exclusively on working income, out of the four factors. Consequently,
they end up with a low or no net worth.
Passive income is money earned without you actively
working. We will discuss passive income in greater detail a
little later, but for now, consider it another stream of income
filling up the funnel, which can then be used for spending,
saving, and investing.
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