Blog | Personal Finance

How to Measure Your Wealth Number

Use time, not money, to calculate how much you need to be financially free

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Use time, not money, to calculate how much you need to be financially free

Brace yourselves. I’m starting off with a question that could very well make your palms sweat and pulse race: If you (or you and your partner/spouse) stopped working today, how long could you survive financially?

If your answer is only a couple of months, sadly you’re not alone. According to a report from Bankrate, the typical American household has an average of $8,863 in an account at a bank or credit union. And even worse, 23 percent have no savings at all. Now that’s a number that makes my palms sweat.

I’m sure you can see why I asked this critical question — it’s one that most people will never stop to calculate. Perhaps that’s because they feel invincible. Or maybe because it’s just too darn scary. But this is why, when the unexpected happens — like a job layoff, an illness, a divorce or a global pandemic that forces millions out of work — so many people are not prepared.

This also illustrates why so many people are struggling in our current economy. It’s at the time of the unexpected event that most people, for the first time, are forced to face the truth of where they are and how long they can survive financially. And that’s the exact moment where you will be faced with the cold hard truth of your situation.

What do you need to live on?

Most people calculate what they want and need in terms of money. “I need $1 million to live on for the rest of my life.” When you talk with financial planners, they talk to you about your nest egg, how much money you will have to set aside to retire. They’ll also talk in terms of your “net worth,” or the value of assets you own minus the liabilities you owe.

However, there is a better way to answer the question. I firmly believe net worth is a worthless way to define wealth. Instead of measuring your wealth in terms of money, it's better to measure your wealth in terms of time — what I call the Wealth Number.

First, let’s look at some common terminology. The terms “rich” and “wealthy” are usually used interchangeably. However, Robert’s rich dad made an important distinction between the two, saying, “Rich is measured in money and wealth is measured in time. Most people focus on getting rich rather than becoming wealthy.”

Dr. R. Buckminster Fuller, a world-renowned architect, futurist, inventor, and visionary, also measured wealth in time. He defined wealth as: A person’s ability to survive X number of days forward.

The two-part question to discover your Wealth Number

In terms of discovering your Wealth Number, there are two important parts to the question, “If you (or you and your partner/spouse) stopped working today, how long could you survive financially?”

  1. If you stopped working today…

    That means there are no more paychecks coming your way. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.

  2. How long could you survive financially?

    We’re talking about survival at your current standard of living, not if you downsized your house, sold your car and rode the bus, stopped eating out, and so forth. Given your current level of expenses, how long would your money last?

Defining terms

For our purposes in calculating your Wealth Number, your money consists of your savings, CDs, retirement accounts, liquid stocks (stocks you could sell today), physical gold and silver you have in your possession — it can include anything that can be converted into cash today. It does not include selling your jewelry, your furniture, or your second car, for example, because that would lower your current standard of living. It does include cash flow from dividends, rental real estate, and other investments that produce income without your effort.

You’ll also need to determine what your monthly expenses are. Note: It’s easy to lie to yourself about how much you actually spend on monthly expenses — so pull out your bank and credit card statements and look at the average costs of everything over the last three months. Be sure to include all your expenses, because you want to expand your financial means to meet the lifestyle you desire, not live below that lifestyle.

Even if you have done this calculation for yourself before, then I encourage you to do it again now. Why? Your finances are dynamic; they are continually changing. You may come up with a similar answer, or you may be surprised by your new outcome.

Do the math

Once you know your total monthly expenses and your sum total of money available, you can determine your wealth by dividing your total sum of money available by your monthly expenses. Here's the formula:

Your available money / Your monthly expenses = your wealth number

Once you do the math and divide how much money you have available by your monthly expenses, you end up with your wealth number. What does that mean? Your Wealth Number is measured in time—in this case, in months.

For example, if your total amount of money is $25,000 and your total monthly expenses are $5,000, then you divide $25,000 by $5,000 and you get 5. This is your Wealth Number. It means that you could survive for 5 months on the money you have currently available without working.

So if your Wealth Number is 24, that means 24 months. If your number is 6, that equates to 6 months. So, this calculation will reveal the exact number of months you could survive if you (or both you and your partner) stopped working today.

So, what’s your number?

Welcome to reality

For most people, this calculation is sobering. It brings you and your money face to face. It is the most realistic and telling demonstration of exactly where you stand today financially.

For a lot of people, their Wealth Number is 3 or less. That means they could only survive without paychecks for three months or less. They are pretty much living paycheck to paycheck. Some actually have a negative number, which means they are spending more every month than they are bringing in.

It really doesn’t matter what your number is. Your number is simply your number. You don’t need to make it right or wrong or continually stress over it. It is what it is. Period. Now you know something that most people will never take the time to figure out. And most importantly, now that you know, you can take action and change it if you choose.

According to the Rich Woman definition of financial freedom, a woman is financially free when she no longer has to work for money because her money is working for her. In other words, she has more money coming in every month from her investments than is going out in monthly living expenses. In this case your wealth number is infinite – you could survive (theoretically) forever from the cash flow that continues to flow into your pocket every month.

Most people are only familiar with capital gains investing — buying something at a low price, selling it at a higher price, and pocketing the difference. In other words, they are focused on trying to get rich. When you focus on investing for cash flow, you are focused on building your wealth, creating passive income that earns you money without depleting or selling the original asset.

So, take a look at your finances. If you are unhappy, or even upset and sad, about that number in front of you — good. That just means it’s time to take some action. Consider enrolling in a free education workshop to learn how to build streams of long-term cash flow, or explore some free tools to help increase your financial intelligence. It’s never too late to start making some changes that will enhance your future.

Original publish date: January 25, 2010

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