Do you ever find yourself comparing financial status to that of your friends? I think we all do it from time to time. We might not ask them details, but based on their job and their lifestyle, we can get a pretty good idea of where we rank in relation to them. The only question is, what are you using as a comparison tool? Are you comparing you salaries? If this is the only means of your comparison, then you are absolutely a broke thinker.
Of course, you’ll never really know all the details about your friends’ earnings or their total savings, but you really don’t need to worry about them. The only info that should really matter to you is your own.
There are two major factors that determine your current and future wealth. If you score well in both of these categories, then you are well on your way to achieving great wealth in the future.
Your Net Worth
To find your net worth, it’s a pretty basic calculation really. All you have to do is take your total assets (your house, cars, savings, retirement fund, etc.) and then you subtract all of your debts (home loan, car loans, credit card debt, student loans, etc.). The number that’s left is your net worth. If you’re a fresh graduate from college, the chances are pretty good that your net worth is negative (those student loans will kill ya in this calculation)! If you’re in this category, then you’d better get yourself to score well in the next factor: excess cash flow.
Excess Cash Flow
The amount of money that you have left at the end of each month is known as your excess cash flow. If, in the above calculation, you discovered that your net worth is negative, I sure hope that this number is positive for you. Otherwise it’s 100% certain that you’re heading toward bankruptcy. You owe everyone money and you’re earning less than you’re spending each month. This is never a good thing.
Hopefully, your story is a little more positive than the above example. I would say that if you’ve been reading this blog for a few months, you’re most likely trying to pay down your debts, which means that you’re increasing your net worth (great job!). And, once your debts are gone, think of all the excess cash you’ll have each month. If used properly, this will lead you toward an even greater net worth, which brings us to our final point.
Invest Your Excess Cash
It’s one thing to have excess cash, but the real question is what you intend to do with it. If you save it up and buy a speed boat in a couple years, then your net worth will soon suffer (as the boat depreciates in value). If, however, you decide to invest that excess money into your retirement fund or use it to start your own business, then your net worth will most likely see a spike in its number! If you make the proper choices here, then your future will just become easier and easier as your net worth grows to an out of control value. 🙂
Are you watching your net worth and your excess cash?