Surprisingly, it’s time (not money) that will gauge 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 less than a month, sadly you’re not alone. According to a 2017 GOBankingRates survey, more than half of Americans (57 percent) have less than $1,000 in their savings accounts. And even worse, 39 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.
This is why, when the unexpected happens—like a job layoff, an illness, an accident or a divorce—so many people are not financially prepared. Unfortunately, it’s precisely at the time of the unexpected event that most people, for the first time, experience the reality 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 Need to Live On, Anyways?
For most people, calculating what they want and need means thinking in terms of money. For instance, “I need $1 million to live on for the rest of my life.” And even when you talk with financial planners, they will mention your nest egg, and discuss how much money you should set aside for retirement.
However, there is a far better way to answer the question. Instead of measuring your wealth in terms of money, it makes more sense to measure your wealth in terms of time. And that, ladies, is what I call the Wealth Number.
When it comes to 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?” Let’s break them down:
- If you stopped working today…
That means there are no more paychecks coming your way. Something has happened and you can no longer work for a business or job. Therefore no income is coming in from those sources.
- 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 gave up your manicures. With your current level of expenses in mind, how long would your money last?
Let’s get clear on some basic definitions to make sure we’re on the same page. When it comes to 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—basically 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.
Perhaps you’ve done this calculation for yourself before. Well, I encourage you to do it again now. Why? Your finances are dynamic; they are constantly changing. You may come up with a similar answer as the last time you completed this exercise, or you may be surprised by your new outcome.
Do the Math
It’s all too easy to lie to yourself (or incorrectly guesstimate) about how much you actually spend on monthly expenses. So be sure to include all your expenses because you want to expand your financial means to meet the lifestyle to which you aspire, not live below your means.
Use this equation:
Your wealth number = Your available money / Your monthly expenses
Once you put these numbers into a spreadsheet 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 equates to 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? Less than you thought? Hint: It’s rarely more than people think.
Welcome to Reality
For most, the outcome of this calculation is sobering. It brings you and your money face to face, which can be uncomfortable. But it is the most realistic and telling demonstration of exactly where you stand today financially.
For many people, their number is 3 or less. That means they could only survive without paychecks for three months or less. That means they are pretty much living paycheck to paycheck. And in some cases, people 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.
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.
Reference: Robert Kiyosaki
p.s. Will do an islamic version of this soon. when i got the time insyaAlah. Too busy with effective project management these few days.
Categories: Personal Finance