You might be a lot richer than you think you are.
Even if you own nothing, you might be richer than the person down the road with the big house and the fancy car.
Why is that?
I’ll tell you why.
Let’s look at what wealth is by using the example of two people.
The first person is a surgeon. She owns a big house with an ocean view, a Lamborghini and whatever else impresses people.
The other person is a nurse. She rents an apartment, and she takes the metro to work. She doesn’t own a car or any property.
Who is richest?
Most people will say the surgeon right away, but you can’t be sure. Don’t let yourself be fooled by a fancy exterior and job titles.
We have to look at their assets and liabilities. In other words, how much debt do they have? Do they own anything that makes money for them?
Let’s pretend that the surgeon recently began working, and that she has a lot of student debt. Let’s say that she bought the car using consumer debt and a credit card loan. Let’s also say that she has a lot of debt on the fancy house. What the bank didn’t lend her, she borrowed from her parents.
Let’s say the nurse is new on the job too.
Neither of them have had any chance to save money or invest in anything.
Who is the richest of the two?
The nurse is. At least if you define net worth as assets minus liabilities. The surgeon has a negative net worth due to all the debt. The nurse is in a neutral position. It may be that the surgeon makes more money, but she is actually poorer.
A Fancy Exterior Says Nothing About Wealth
Remember this, because it’s really important.
You can’t judge a person’s financial situation by measuring exterior status symbols such as a house, car, or title.
How wealthy someone is really depends on how they manage their money.
This is really good news, if you think about it.
It means that if you don’t own anything, but if you don’t have any debt either, you are in a neutral place – and that’s a pretty good place to be in.
You are in a better position to build your wealth than the majority of people. A lot of people start out with a negative net worth. First they have to chip away at the mountains of debt, and only then can they begin to build their wealth.
Debt moves you backwards because it sucks money out of your finances. You could say there’s a hole in the bucket, and your money is dripping out of it.
You want to let your money work for you, so you don’t have to work so hard for money.
Debt is the exact opposite of that. It’s letting your money work against you, so that you have to work harder for it.
People with a lot of debt are pushing a cart up the mountain, and it’s harder for them to reach the top and become financially independent.
How to Calculate Your Net Worth
How do you actually calculate your net worth?
It’s pretty easy, and a bit of an eye-opener (if you haven’t tried it before).
Here’s how you do it.
You have to find the present value of everything you own, and figure out how much debt you have. In other words, you have to figure out what your assets and liabilities are.
Just a note before we begin: I normally don’t consider your house or your car to be assets, unless you rent them out and make money from them. But for the purpose of this exercise, we’ll count them as assets.
How to find assets:
- What’s the value of the house or apartment you own (if you have one)?
- What’s the current value of any stocks or other securities that you own?
- What about your retirement savings?
- If you were to sell your car today, how much could you get for it?
- How much do you have in cash?
Then you have to find all your liabilities, meaning all your debt.
How to find liabilities:
- How much do you owe on your house?
- How much in student debt?
- What about credit card debt?
- Or any consumer debt?
- Do you owe anyone else anything?
Then you add up all your assets and deduct all your liabilities. What’s the result?
I encourage you to keep track of your net worth – it’s very motivating.
Top 10 percent
When I did this calculation for the first time, I discovered that I was among the top 10 in my country (Denmark).
At the time, I was an unemployed single mother of two small children, and I was living in a small apartment in the capital.
I didn’t feel very wealthy, but this exercise changed that perception.
I could easily calculate the result. I took my cash savings, added my stock portfolio, the value of my apartment, plus my retirement savings. There was nothing to subtract as I had no debt.
I discovered that I was richer than a friend who had recently bought a huge house in a fancy neighborhood. I knew that she had no retirement savings (we talk about money), no investments, and that the house and the car were bought with borrowed money.
This made me feel different about my own priorities, and instead of feeling like the poor friend, I began feeling like the smart friend.
The next time you hear about some friend who bought a huge house or drives a Tesla, remember the old saying: Don’t judge the book by (the house or the car) on its cover.
It says nothing about how they’re really doing.
Do you want to learn how to build assets? I teach you how to get a good return on stocks in my free e-book Free Yourself. You can download it here.