Which of these 3 ways do you use to measure wealth?

time-is-money

Before I begin this post, I must make it clear that by ‘wealth’, I don’t mean intangible wealth like health, love, family, friends and freedom. I know that tangible wealth isn’t everything, but I think we can all agree that it isn’t nothing either. Whether we like it or not, money is a fundamental part of our lives. The vast majority of us work in order to earn our living, and we hope that someday we will have accumulated enough wealth to be able to retire in security.

In this post, we’ll look at three ways in which we typically measure wealth.

1. By Income

This is by far the most common parameter used in India. Have you noticed how parents always manage to slip in details of their children’s salaries into conversations at just about any social gathering? Just the other day I was at a friend’s engagement, and I sat next to an elderly lady decked up in a shiny silver sari. She was holding court with a bunch of her friends, and I caught the words: ‘The groom works for Intel, I heard. He earns x rupees a month.’ A round impressed (and envious, perhaps) clucking followed.

Income is also an important parameter in marriage decisions. In one of my first meetings with a prospective bride, I was asked by her brother in a room full of people how much I earned per month.

But this figure could often be misleading. A person servicing debts and expenses could be earning a high income and yet be left over with very little at the end of the month. My parents’ current housemaid works for a government hospital and makes more per month than my father. And yet she has to pay the interest on so many loans that at the end of every month, she borrows some money from my mother.

2. By Net Worth

This is the sum total of the values of all your assets minus your liabilities. Hopefully it’s a positive number. This figure is generally not thrown around in polite conversation, mainly because people tend to keep it secret. While salary could be guessed using a person’s job profile and experience, net worth is almost impossible to determine at a glance. So we don’t discuss it.

While this could give a reasonable indication of a person’s wealth, it can sometimes fall flat too. A person who owns four or five houses and services loans on all of them will find himself paying money from his pocket every month. Then, too, what of those who own land that doesn’t earn them anything? It is there to be sold if necessary, yes, so it works as security, but in real terms, is it adding to wealth?

3. The Wealth Number

We often think of wealth as a money figure, whether in dollars or rupees. But the problem with that is as our monetary wealth increases, our lifestyle expands too, so while today you may think that x rupees is what you need to retire, you may find on accumulating your target amount that your lifestyle now demands a much higher amount of money.

A better way, I think, is to think of wealth in terms of time. In other words, if you were to stop working today completely, how many months into the future can you (and your dependents) survive at your current lifestyle? Obviously, the higher this figure, the wealthier you are.

This is called the Wealth Number. Most financial planners recommend a minimum of 6.

The great thing about using this as your parameter of wealth is that by adjusting your lifestyle, you can become wealthier. If your current monthly expenses are 10,000 rupees, say, and you have 100,000 rupees saved in your account, you may at first glance think that your Wealth Number is 10. But what if you can reduce your monthly expenses to, say, 8,000 rupees?

You’ve not changed jobs. You’ve not received a promotion or a hike. But you’ve increased your wealth by 20%. Your Wealth Number is now 12.

Read this and this for a couple more views on this topic.

The time value of money

There is always that nagging question at the back of our heads: what is more valuable, time or money? My answer is time, because it goes in only one direction. We can trade in our time for money, but no amount of money can bring back the time we’ve lost. So it makes sense to me to measure wealth as a time figure. We should all, I think, have a Wealth Number that we’re comfortable with, and strive to achieve it – either by earning more or spending less.

What do you think? Which of the three parameters do you use to measure your personal wealth? Do you agree that defining wealth in terms of time is a viable long-term strategy?

Image Courtesy: Flickr

Comments

  1. There are no three definitions of Wealth. Networth is the only measure of wealth.
    Income is not a measure of wealth. Income is a P/L concept while Networth is a Balance Sheet concept.
    Universally Networth (Assets less Liabilities) is used to measure Wealth. Wealth Number is a measure of liquidity.
    When you are talking about the difficulty in selling 5 houses, you are confusing wealth with liquidity. The concept of wealth number was introduced by Kiyosaki in his book ‘Rich Dad, Poor Dad’.
    Also if you notice, wealthy people always talk in terms of Networth. They never talk Income. Income is a concept which us mostly used by Middle Class.

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    • Hi Ram,

      Yes, I agree with you on a technical level, that wealth should not be equated with income, and that strictly speaking, net worth is the only true measure of wealth. I was trying to sort-of use the parameters the ‘middle class’ in our country use to measure wealth.

      Also agree that wealth is not the same as liquidity. And the example I gave was not to drive home the point of selling 5 houses, rather to suggest that someone could have a high net worth and yet be servicing debt and working with a monthly negative cash flow.

      Also, ‘Wealth Number’ may have been coined as a word by Robert Kiyosaki, but the concept has existed for a long time. I think I remember Ludvig Von Mises saying that sometime early in the twentieth century. As always, Robert is very good at repackaging old concepts. (Not saying it’s a bad thing. I suppose even my post is doing the same.)

      Thanks for the comment, Ram. I will be posting here regularly on money and personal finance, so will look forward to interacting more with you 🙂

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  2. To me personally The Wealth Number is what makes most sense (although I hadn’t quite defined it with that term and associated it more with how many months can I sustain my current lifestyle even if my salary stopped hitting my bank account). And yes, this is probably the only one we have some degree of control over, given that in this we can regulate our expenses.

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    • Thanks for the comment, Jai. I also think that Wealth Number allows any of us to be wealthy, regardless of ‘how much’ we have. I think it does a great job of allowing us to define our own parameters of wealth, which is very important because modern society keeps trying to tell us how wealthy we should be. The same thing goes for success, but I guess that’s another topic altogether 🙂

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  3. While I do agree with the essence of the article to plan wealth by earning more or spending less, I beg to differ on the land part. Land does add to the wealth by appreciation and it can be leased for regular income. Overall nice blog.

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    • Hi Niraj,

      Yes, I agree. Maybe I was not clear on that part. What I meant was sometimes, ‘net worth’ is not a great indicator of ‘wealth’ per se, because a) you could be debt-ridden while possessing enormous net worth, and need to work to service it, an b) sometimes, people own land just for appreciation and do not earn a regular income from it. Rather like gold.

      But yes, when it is put into use to generate passive income, it adds to your Wealth Number.

      Thanks for the comment. Welcome to the blog 🙂

      Like

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