There sometimes seems to be a huge disconnect between what people believe money is and what money actually is. Case in point – if you’re building debt, you’re not building wealth. Debt and wealth are complete opposites.
Yes, I know there are folks that have been very successful with levering debt to build up their wealth, but those folks are very small in number. I mean, how many people do you really know that have done this – meaning how many people have done this and know their actual Net Worth?
You see somehow we started associating the amount of debt we have with our Net Worth. Like, if you drive a really nice car and live in a really nice neighborhood, then you must have a high Net Worth.
The truth is, that very few people that live that lifestyle have a high Net Worth. Nothing drives me more crazy than to hear folks telling me about their new investment, but they fail to tell me how on earth they are going to pay back the money they borrowed to invest in that new thing. Higher debt does not equal higher wealth.
What Net Worth really is.
Here’s the thing, Net Worth is:
Your Assets – Your Liabilities = Your Net Worth
Which means, you need to list out and total up your assets – the cash you have sitting in the bank, the equity you have in your home, car, boat, trailer, etc. Then you need to list out your liabilities – your debts, the things you owe money on (this includes the mortgage) and total those up. Then plug in the numbers into the equation above and you have your Net Worth.
I’m a huge fan of calculating your Net Worth because it was the number that pushed my husband over the edge and got us started on the debt-free journey. My husband didn’t like that little number. It bothered him to see that even though our home was valued at $200,000 our total Net Worth at the time was only $60,550 once we factored in our consumer debt and the amount that was left on our mortgage back then.
Something funny happens when we can change our perspectives. All of sudden, we can’t just accept how things were, we have to change them. It bugs us enough that we are motivated to act.
Action beats out knowledge.
The thing is, if you calculate your Net Worth right now and you’re unhappy with that number, you’ll need to take action to see the change that you want. Literally, nothing will happen until you act.
So, what is your next course of action? Do you have some debts you need to pay off? Do you need to build up a beefier emergency fund? Do you need make some lifestyle changes?
The answer is totally dependent on you and your specific situation. There’s no “one-size, fits all” approach to personal finance – after all, it’s personal. Meaning that it’s unique to you and what works in your house is probably not going to work in your neighbor’s house.
Money principles that hold true.
Even though money will work differently for you than for me, there are still money principles that apply to all of us. Money principles that say your consumer debt should never exceed the amount of cash you have to pay it back. And if you’re on the debt-free journey, I encourage you to avoid debt like the plague.
Here are a few of the money principles that I believe every one should live by:
- Always, always have an emergency fund. The goal with this account is to build it up to at least 6 months worth of living expenses (your bare bones expenses that are required to live) and to maintain that amount. Head here to watch the video on building up an emergency by first building up your “starter” emergency fund.
- Your home should not cost you more than 30% of your monthly take-home pay. If your mortgage or rent payment is more than 30% of your monthly take-home pay, you’re going to always struggle to pay your expenses every month. << I want you to re-read that last sentence because it’s super important!
- Take your monthly rent/mortgage payment amount and divide it by your monthly take-home pay and then multiply the amount by 100 to come up with the current % of your budget that is being consumed by your housing payment. Example: Your monthly rent is $1,200 and your monthly take-home pay is $5,500. The precent your home is consuming in your monthly budget is, 22%.
- Take your monthly rent/mortgage payment amount and divide it by your monthly take-home pay and then multiply the amount by 100 to come up with the current % of your budget that is being consumed by your housing payment. Example: Your monthly rent is $1,200 and your monthly take-home pay is $5,500. The precent your home is consuming in your monthly budget is, 22%.
- Pay it off. You know I’m a huge live debt-free fan because my family is living proof that you don’t need debt to live an amazing life. You don’t need credit cards to pay for a vacation or emergency (we haven’t had a credit card in over 5 years). If you drastically reduce your debt, you drastically increase your overall Net Worth at the same exact time.
- Always keep a line-item in your budget for the future. Meaning, you should always be saving up towards something whether it’s a retirement goal, vacation goal, new car, college, wedding gift for you kids – always be saving up towards something in your future. This will keep you motivated to stick to your budget always.
- Keep your expenses low. Yep, you knew this one was coming because you’ve probably have heard “live below your means” since you can remember, but are you living that way? If not, then it’s time to change that up ASAP! Work on lowering your expenses today and you’ll give yourself a raise without even having to ask your boss or change jobs.
So, you tell me, what is one thing that you’re going to work on today in order to increase your overall Net Worth?
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