LOUISE FAIRSAVE – Building wealth
Income is not wealth. A higher income will provide the opportunity to accumulate a higher net worth, and to build wealth. Yet, by itself a higher income will not necessarily contribute to wealth building.
A useful approach in measuring how you are doing on building wealth involves considering your age, your income and the length of time you have earned income, assuming you maintain a satisfying lifestyle.
For example, take your age and divide it by ten, and then multiply the result by your current annual realised pretax income from all sources, except inheritance income. This final result, less any inherited wealth, is a benchmark for what your net worth should be if you have been wealth building.
Specifically, for a 36-year-old man who earns $44 000 before tax annually, plus another $1 000 in bank interest income, his total annual realised pretax income would be $44 000 plus $1 000 equals $45 000.
His age, 36, divided by 10 is 3.6. Then 3.6 X $45 000 gives $162 000 which should be his expected net worth. He should then prepare an analysis of his net worth and compare it to this benchmark.
It would be expected that the man who has worked for a longer period would have the higher net worth.
If an earner has net worth well above the benchmark, then that person is a strong wealth builder. For an earner who is just about at the benchmark level in terms of his net worth, he is an average wealth builder.
In cases where the person’s net worth falls below the benchmark level, then he is an underdeveloped wealth builder.
If his net worth is twice the benchmark level or more, then he is an excellent wealth builder.
On the other hand, if his net worth is less than half the benchmark level he is obviously travelling along the wrong street. For you, even if you cannot check how well you compare with persons in your grouping, you have a means of self-evaluation. How do you rate?
Many people with relatively high incomes are caught up in the lures that encourage conspicuous consumption. For them, it is harder to accumulate wealth although they earn a high income.
Simply, a rich man (a man with lots of assets) is not necessarily a wealthy man.
You may ask why you are not well off and comfortable in spite of earning an adequate income? Maybe you are spending too much rather than saving and investing.
Material goods are depreciating assets. Financial assets are generally appreciating assets.
It is not surprising that research shows that auctioneers in the United States have a higher number of millionaires in their grouping than any other work group. Auctioneers truly appreciate the liquidation value of depreciable assets, and tend to place their fund in more sound investments.
Poor wealth builders typically have a high propensity to spend; they live above their means. Excellent wealth builders, on the other hand, tend to be frugal; they live below their means.
It is recommended that those who want to build wealth spend more time planning and budgeting their spending. The more detailed the plan and budget, the better.
Paying yourself first is a potent spending system that forces you to live on what is left.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.