Do you consider yourself to be rich? Most of you would answer no to that question. You probably live in a fairly average house, drive a pretty normal car and have to save up for holidays, luxuries and your child’s university education. Your life is a world away from the flashy car, blingy mansion and luxury getaways on a private jet that define those who are really rich, right?
It’s all relative though. You may not be rich compared to the Kardashians but owning any home and a car and being able to afford a holiday at all makes you rich compared to vast swathes of the global population. It’s always better to appreciate what you do have rather than worrying about the things that you don’t.
So if comparing yourself to others is not a good way to assess how rich you are, what is? Hint: it’s not income either. Having a high salary doesn’t equate to being rich if you blow every cent each month and have sizeable debts. Conversely, you could earn very little but have high net worth, for example if you have been the lucky recipient of a bulging trust fund or inherited a home.
In actual fact, the best way to work out whether you are rich is to look at your net wealth.
Your net wealth is the value of your assets minus the value of your liabilities. To calculate it, you take the value of everything that you own including cash in the bank, properties you own, stocks, shares etc and take off any amounts that you owe (mortgage, credit card debt, car loans etc). That will tell you how much you are actually worth. And you may well be much richer than you think.
This approach contradicts the messages that we are constantly fed by the media. We are relentlessly bombarded with images to convince us that all we need to be happy is to spend and acquire more things. We see the trappings of wealth and assume that people are wealthy. We rarely see the boring stuff that underpins true wealth like hard work, discipline, saving and investing. These are the things to aim for if you want to be truly rich.
Of course, life is to be lived and I’m not suggesting you embrace utter frugality but choose to splash the cash on the things that you really love and keep costs low on everything else so that you have money leftover to acquire assets that are going to give you a return and build your wealth. It’s all about balance.
Which is where financial planning comes in. A well-conceived financial plan tailored to your unique circumstances can ensure that you are using your disposable income wisely to invest in order to grow your net worth and obtain financial security for you and your family both now and in the future. In our book that is what being rich really means.