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.
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?
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