Are you a Wealth Generator?

When it comes to generating wealth, net worth is what counts. In fact, studies show that those in certain high-income fields are at risk for diminished net worth. There are many people who earn millions and yet they’re broke.

What’s your net worth?

A wealth generator should know their net worth. Your net worth is calculated by subtracting your debt from your assets. Debt includes the balances on your home loan, car repayments, credit cards, medical bills, and other debt. Assets include fair market value of cash and cash equivalents, savings, investments, retirement savings and personal property. Some researchers, including Thomas Stanley, Ph.D, bestselling author of The Millionaire Next Door, who’s extensively studied millionaires for over 30 years, believes only investments that are “reasonably liquid” should be included in the assets category. The reasoning is that an asset like your home doesn’t generate income.

Knowing your net worth gives you a foundation to build on. You might set a goal for increasing it by the end of the year, by 5 or 10% or a figure you feel you can meet (the main thing is setting a goal; you have a better chance of achieving it than if you wing it). Then…

Become a wealth accumulator

Stanley divides affluent people into two categories: The income-affluent and balance-sheet affluent. The income-affluent are the ones mentioned above, those who earn a lot but spend it, so their net worth builds slowly or not at all. The balance-sheet affluent are those who build their net worth as quickly and effectively as possible, regardless of income (but it helps if they make a good living) by living simply and saving. According to Stanley, the difference between wealth accumulators and “under-accumulators” is self-discipline.

Stanley created a formula to gauge what your net worth should be (i.e. whether you’re a good saver) given your age and income. To figure out where you stand, multiply your age x your gross income x 10%. For example, if you’re 35 years old and make $90,000, you should have a net worth of at least $315,000. If your net worth matches that number you’re an average accumulator; if your net worth is less than this figure, you’re an under-accumulator. If it’s twice as much, bravo! you’re in great shape.

If you find yourself in the under-accumulator category, don’t fret. Most people are like you. 

To get the ball rolling faster, here are 5 tips for boosting your bottom line:

1. Become a great money manager. Many people spend too little time managing their money, says Stanley. The millionaires he surveyed put in about 20 hours a month. If you think that’s too much, don’t plan to be a millionaire. Millionaires consider money management their part time job. “Planning is typically found to be a strong habit among people who have a demonstrated propensity to accumulate wealth,” writes Stanley.

2. Stop spending tomorrow’s cash today, and start savings today’s cash for tomorrow. Another way of saying ‘spend less than you earn and save, save, save’. Not to mention nixing the credit card spending unless you have the cash on hand and pay your cards off monthly. According to Stanley, credit card debt is one of the main reasons for diminished net worth.

If you’re not saving now, go through every expense you have and cut where you can, even temporarily. You’d be surprised where you can cut if you really sit down and try. Saving may sound impossible for some, and if so, earning more or spending less is the only way.

3. Align financial decisions with your values. Know what’s important to you and what’s not so you spend consciously on what matters. Otherwise, you’ll accumulate a lot of what you don’t want (debt and unnecessary clutter) Not only will it keep you from financial security, but as finance expert David Bach writes in Smart Women Finish Rich, “If the way we handle money conflicts with our personal values, we are not going to wind up living happy and fulfilled lives.”

4. Adopt “millionaire intelligence.”  The keep-up-with-the-Joneses culture still reigns; unfortunately ,those who get caught up in it are likely in debt, according to Stanley’s research. The fact is, the majority of true millionaires (aren’t flaunting fancy cars and expensive homes. They live in ordinary neighborhoods, drive ordinary cars, and dress in ordinary clothes while their money grows in investments.) Russ Alan Prince and Lewis Schiff, authors of The Middle Class Millionaire: The Rise of the New Rich and How They Are Changing America, call this way of life and mindset “millionaire intelligence”—applying middle class values to create a rich life.

5. Close that “knowing-doing” gap. That phrase from social psychology perfectly describes why we get stuck. We know what we need to do, but we aren’t doing it. Take that next step and close the gap. If you’re not a wealth accumulator now, start moving toward it, and the security it brings.

I want to challenge you to take one step toward being a wealth-accumulator today. 

(Thomas Stanley, author of the “The Millionaire Next Door”).