Everyone is fascinated by someone’s net worth because most people use it to define wealth. Net worth is simple to determine, but it’s hard to figure out its value. Saying you are worth a certain amount of money doesn’t mean you are necessarily rich.
Net worth is a by-product of static wealth. Passive income is a by-product of functional wealth. Understanding the differences between these two numbers is vital to becoming a bonafide investor. Let’s dig deeper.
Net worth. You can determine net worth by finding the difference between your assets and liabilities. For example, say your house is valued at $500,000 and you owe $200,000, which means $300,000 goes towards your net worth.
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You also add in all your properties, investments, and perhaps businesses. Businesses are harder to determine value, but I give a simple way later in the article. Once you have the total, we call this your net worth.
Now, does one’s net worth tell them how much income their investments produce? That’s where passive income and functional wealth become valuable.
Passive income. Passive income only concerns itself with the revenue that an investment generates. Whether your rental home is worth $500,000 or $200,000, all I care about is how much revenue it generates after expenses.
It is the same for a stock market investment portfolio. Someone might have $1 million in Google (Goog) stock that doesn’t pay dividends. Someone else may have $1 million in McDonald’s stock that pays them $25,000/year. Which would we call functional wealth?
Passive income comes from many sources, and most people don’t consider it wealth. That’s why this article is so important; you need to start envisioning the world through the lens of passive income.
Mailbox Money: The Power of Dividends, Royalties, and Rents
Passive income lens. A military pension is an excellent example of using your passive income lens. I have been in the Marines for 22 years, and many Marines have asked me to assist them with a decision to leave the Corps.
I always let the numbers do the talking. If you retire at age 38 with twenty years of service, you will probably bring home $2,500/month for the rest of your life (plus the cost of living increases). How much money would a dividend portfolio need (4% yield) to receive $2,500/month?
You would need $750,000 in a dividend portfolio by age 38 to match your military pension. (However, medical with a military retirement is superior to most work options.) When you see the world through the passive income lens, it becomes easier to make solid comparisons.
Business lens. I also like to run my business through the passive income lens. I am currently earning roughly $110/month from books and blogs. I would need $33,000 in a dividend portfolio to achieve an equal passive income from stocks.
Remember, my business royalties cost me very little money to build, unlike trying to save and invest $33,000. It is good to know there are ways to make money without first having money. I use passive income exclusively to determine the value of my investments.
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The danger of net worth. The threat of net worth is that it doesn’t require much skill to acquire a high net worth. Sometimes it is just luck and fate to buy a home, Pokemon card, wine bottle, etc., that grows in value.
Let’s say you found a Pokemon card at a garage sale for $5, and it is worth $500,000.You now added to your $500,000 net worth. You can hold this card for years and never receive a penny from it—this is similar to the difference between capital gains and dividends.
If the market crashes, a pandemic happens, or a Pokemon card dips in value, your net worth crashes along with the changes. When you sell the card for cash, what will you do with the profits? How will you invest in another asset to give you a return on your investment?
The biggest problem with net worth is it doesn’t encourage the owner to become an investor. It is far easier to say I have $300,000 equity in my home than learn how to diversify and invest $300,000.
Main street vs. Wall Street. I hear people all the time saying, “I have $300,000 in home equity.” or I have a net worth over $1 million. Most of the time, they tie their net worth with the value of their home.
Passive Income: Royalties vs. Automation
Now people on main street do not know how to invest for dividends, interest, real estate, or business. In “Rich Dad, Poor Dad,” Robert Kiyosaki says your home is not an asset. I agree wholeheartedly.
Most investors on wall street understand that passive income is the metric that keeps life operating. I could receive $80,000/year by investing $1 million with an Income Investing portfolio. That’s incredible.
Or, I could keep growing my book business to $4,200/month of revenue. That would equal $1.25 million in a dividend growth portfolio. Learning the ways of passive income is the superior metric for building a cash flow retirement.
Conclusion. Do not let big numbers fool you; income is all that matters. You need to know how to invest a windfall of money. We have all seen people who hit the jackpot with real estate in California because the military stationed them there.
They have a cash pile and don’t know how to invest further. As we can see with crypto and real estate, it is hard to get “lucky” twice in the same market and timeframe. You will need to understand investing.
If I had to say it bluntly, net worth is a metric used by beginners, and advanced investors use passive income. Determine which you are and adjust accordingly. I only look for my net worth to see how much equity I can extract from my homes and reinvest in other assets. They call this transfer between assets the velocity of money.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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