Net worth has become a status symbol; apparently, if you are a net-worth millionaire, that is supposed to mean something.
However, having a high net worth doesn’t necessarily mean you are wealthy. There is a massive difference between static and functional wealth.
Today, let’s determine your net worth (and mine’s) and see how this money can help us survive without a job.
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What is your net worth? Net worth became a big deal because of home equity. Most Americans attribute their net worth to rising house prices.
It was cool to brag about net worth during the 2002-2006 housing price run-up. However, everyone was quiet after the 50% haircut we took in home prices between 2008 and 2010.
My home value plummeted during this time, so I felt the pain of having my net worth destroyed by a house appraisal.
The first step to determining your net worth is writing down all of your assets. I am squarely in the Robert Kiyosaki camp of assets.
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Assets versus liabilities. “Rich Dad Poor Dad,” “Rich Dad’s Guide to Investing,” and “The Cashflow Quadrant” are the most influential books I have read.
An asset is anything that puts money in your pocket. Before I read these books, I would add my cars and video game collection to my list of assets. Now, I understand why these things mean nothing.
A liability is anything that takes money from your pocket, including car notes, student loans, credit cards, boats, cars, etc.
To figure out your net worth, take your home equity, savings accounts, and investments, and subtract all of your debt.
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What is my net worth? I have worked hard to pay off my credit card debt and start collecting assets.
My wife and I own three homes with a combined home equity total of $500,000. We also are close to $300,000 in our various brokerage accounts. I also own a business, but it’s not worth much yet.
So, let’s say our net worth is $800,000—what does that actually do for us? Absolutely nothing. It’s a significant amount and is definitely better than being a negative number.
The magic of cash flow. Before I read these fantastic Robert Kiyosaki books, I believed having a high net worth meant something. In the end, it is just a number for bragging rights.
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The only important number is cash flow, which determines your wealth. Wealth is the difference between income and expenses.
So let’s look at my net worth again, but through the lens of passive income and cash flow. We will move past static wealth (net worth) and into functional wealth (cash flow).
Does your net worth create cash flow? First, let’s look at my three properties. My first home produces $230 after the mortgage and property management.
The second home nets $400, and the final home produces $1,000 (from one roommate). In total, we receive $1,630/month in rental income.
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Second, I want to review our investment portfolio. I am a hardcore income investor and have index funds, treasury bonds, and dividend growth stocks.
Our portfolio produces $1,200/month as dividend income. We can use this money to make our lives easier and less stressful.
Most workers have their money in 401Ks that don’t produce any usable income until age 60. Then, the employee has to learn how to convert their 401K lump sum into functional income (dividends).
It can be challenging to learn income investing at advanced stages in life. That’s why I am a fan of starting a brokerage account early to start dividend investing.
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Finally, I will review my business. I have an automated business (website) and royalties (books). Together, they produce roughly $200/month in passive income.
Eventually, these business ventures will surpass my dividend income, which could be years away. You must build an audience to achieve great things in business (and this takes time).
Surviving without a job. If I lost my job today, I would have $3,000/month in passive income. Could I survive with this amount of money? Yes, with some hard work.
First, I would get an additional roommate in my primary residence. That would give me an extra $1,000/month.
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All I need to do is find a part-time job to pay for food. I would dedicate more time to building my business, perhaps shooting more YouTube content and doing military consulting.
Luckily, I have been in the military for almost 24 years, so I would walk away with over $5,000/month in passive military retirement income. That would put my total over $9,000/month.
How long can you survive without a job? I wrote this article to get you thinking about your own situation. Sophisticated investors think beyond static wealth and focus on cash flow.
Are you collecting fancy cars, bottles of wine, or Pokemon cards? Do you have a plan for these to produce income?
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If you lost your job, what assets do you have that produce monthly recurring income? These are simple questions with simple answers. However, you will need complex knowledge to put things into motion.
For example, you need to understand real estate rules and local behavior to rent your home. To be a good income investor, you must follow interest rates and treasury yields.
Conclusion. We have many choices in life, and bragging about our net worth is one. If you live in a high-net-worth city like San Diego, you will hear people throwing around big numbers.
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However, how many of these people understand the difference between cash flow and net worth? If the housing market tanks, can these people survive?
The average American is continually extracting home equity to fund their lifestyles. They use debt (home equity loans) to buy liabilities (cars, boats, trips, jewelry).
Robert Kiyosaki taught me that you could use debt (cash-out refinance) to buy income-producing assets such as dividends and businesses. You can then have your tenant pay off your higher mortgage.
If you want to understand cash flow, ask yourself how long you can survive without a job. Do you have income-producing assets? If not, that needs to be a top priority. Good Luck!
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