Do you know someone that’s extremely wealthy? Did they win the lottery? Did they receive a large inheritance? Or, maybe they acquire funds through a lawsuit? While these ways may be popular in the movies, I would be very surprised if your wealthy friend became wealthy through any of these mediums. Typically, wealth comes to those that think differently and go against the grain of society.
What is Wealth?
Simply defined, wealth is often explained as someone’s total assets minus their total debts. Sure, this is a bit simplistic, but for the most part, it’s right on the money (hehehe, I just couldn’t help myself….).
So, let’s say someone owns a $350,000 house, a $50,000 car, and a $100,000 yacht. Are they wealthy? Well, it depends. If they are $450,000 in debt and only own these assets that are worth $500,000, then I’d say no, they are most certainly not wealthy.
If, however, this another individual owned all of these items with no loans whatsoever and they had a few investments that earned a passive income, I’d say they are much closer to wealth than the first example.
Don’t Think Like The Poor
Sometimes it’s difficult to know if someone is poor or rich in our world today. By utilizing credit, one could borrow enough to own that $350,000 house, the $50,000 car, and the $100,000 yacht. All they have to do is make the payments!
With this “payment” mindset, the poor are programmed to think in terms of the weekly paycheck. If they take home $500 a week, they know that they’ll need to eat and pay some bills, which might equate to about $300 a week. So that means that they have $200 left! About $110 goes toward a house payment, $60 for a car payment, and $30 a week for a boat.
Notice that this “poor thinker” has all of the assets of someone that might appear wealthy, but they have absolutely no extra cash at the end of the week! Plus, 2 of their “assets” are depreciating as each day passes by.
It’s true that a monthly income is important, but if you’re trying to live the high life on debt, I’m telling you right now that you’ll be poor forever.
Think Like The Wealthy
Rather than thinking in terms of a weekly paycheck. The wealthy think in terms of net worth. This is the key factor that separates the wealthy from the poor. Let me illustrate this with an example.
When searching for a vehicle, the poor mindset is looking for the “most car they afford”, which basically means that the bank will give them X amount of dollars, so they are looking at vehicles in that range because they can make the payments.
Now, since the wealthy probably have the cash to afford a vehicle, they just find themselves a sweet ride, lay down a brick of hundreds, and drive it away no questions asked, right? Wrong.
The wealthy did not build up their bank account by frivilously buying depreciating assets. They know that a brand new car will lose 60% of its value within the first four years, which means that this “asset” could have been worth $20,000 brand new, but is soon valued at just $8,000. And, since the asset is depreciating, so it their net worth, which goes against the grain of the wealthy mind.
If you know someone that is truly wealthy, you know that they aren’t purchasing brand new cars that are worth $50,000. They will look for a good deal on a 4-5 year old car from a private party.
Your Focus For Wealth: Net Worth
If you can wrap your head around this simple concept, there’s no doubt in my mind that you will soon be considered wealthy as well. My wife and I are doing our best to implement this key principle, and we can tell that it’s starting to pay off big time! The value of our assets are increasing, and our liabilities are decreasing.
What are you doing to improve your net worth? Are you on your way to becoming wealthy?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.