What's Your Wealth Number? image

What’s Your Wealth Number?

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

If you (or you and your partner/spouse) stopped working today, how long could you survive financially?

That is a crucial question and one that most people will never calculate. This is why, when the unexpected happens—like a job layoff, an illness, or a divorce—so many people are not prepared. This is one reason why so many people are struggling in this 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.

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.

However, there is a better way to answer the question. 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.

The two-part question

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. 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—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.

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

Your wealth number = Your available money / Your monthly expenses

Note: It’s easy to lie to yourself about how much you actually spend on monthly expenses. Include all your expenses because you want to expand your financial means to meet the lifestyle you desire, not live below that lifestyle.

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. So if your wealth number is 24, that means 24 months. If your number is 6, that equates to 6 months. And what does that mean? Your wealth number is the 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, 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 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. 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.

Look at your finances. If you are unhappy, or even upset and disturbed, about that number in front of you—good. That just means it’s time to get to work.

Original publish date: August 29, 2013