“The Real Measure of wealth is how much you’d be worth if you lost all your money”
– Bernard Meltzer
When I first read the quote above, it immediately felt right on. As a student of success, I still wanted more perspective to understand my own strengths and weaknesses better. At a few points in my life, I thought I was doing OK, but I have since learned that I was measuring “real wealth” wrong. This was a wakeup call for me. Sure–by many definitions, my family and I are healthy and our assets are 7-figures higher than our liabilities. That’s good, right? Not so much.
The issue is that by a more important definition of wealth, we won’t experience real wealth until we fix a particular problem.
The question is not how much money we have or how much we make. The more important factor is how long we can sustain ourselves at our current lifestyle without working. How long could you sustain with your current expenses? I didn’t like my own answer to that question.
Could you go one year without working and sustain your current lifestyle? Could you go three years? If so, congratulations, you’re better off than most. But, does a few year’s sustainability amount to wealth? Is that financial freedom? Not even close. If we can’t work or we experience an economic downturn, we might be just a few months or years from disaster.
Keep in mind, many economic trends run in seven year cycles. If we invest our money and hit a down-trend, can we wait seven years for it to appreciate or will we have to sell at the bottom? With real wealth, we could afford to wait for the trend to turn around and sell closer to the top.
A real sustainable lifestyle “real wealth” would be the ability to live comfortably debt-free and at a level that does not even come close to eating into our principal assets.
One million dollars cash earning five percent annual interest would net about $50,000 per year. Could we live comfortably off $50,000 per year and still take an occasional financial hit when things don’t go as planned? Not most people and certainly not with a family.
So, in this day and age, we need a strategy to live far enough below our means to accumulate wealth much faster than we consume it. Looking at it this way, I have a lot of changes to make.
How “low-consumption” should we be living? That is a personal decision depending on your age and earning ability, but I’m going with an aggressive plan to be safe.
Here are some of the things I’m planning on doing personally:
1.) We will stop using bank financing for anything but real estate. If we can’t afford to pay cash for what we want, then we won’t buy it.
2.) We’re going to reduce our expenses to consume no more than 1/2 of our net income. If that’s not a good enough lifestyle for us, we better make more money!
3.) We are going to make diversified investments under our own management and not entrust so-called “experts” with our financial future.
That’s my plan, I’m sticking to it. If you have a better one, please share it.