Net Worth Is Measured in Assets Owned, Not Owed

When I was 18 years old, I believed that in order to become a productive member of society, I needed to establish credit. I wrongly believed that once I could manage the use of credit, I would be on my way to becoming successful. However, I have learned over the years that the use of credit and being successful are not necessarily linked. I bought into the lie sold to me by the credit card companies and the Fair Isaac Corporation (which created the credit scoring model known as FICO), that successful people use credit to become wealthy. A FICO score does not communicate your level of wealth. In many cases, it merely reflects a person’s inability to manage his or her income and impulses properly. People who have a high FICO score are not necessarily wealthy nor are they necessarily poor. Using credit doesn’t mean you are poor, but from a net worth perspective, the more debt you accumulate and the more interactions you have with credit, the greater your chances of being poor become.

How you measure wealth is important. Wealth measured as a product of income is inaccurate because you can earn a hefty income and still not have any savings. As a matter of fact, the Median net worth of Americans reveal a scary picture. In his article titled “Americans' Average Net Worth by Age -- How Do You Compare? American's net worth may not be enough to offer financial security in retirement”[i] Todd Campbell provides a graphic that compares overall net worth verses overall net worth excluding equity in own home. His data is pulled from the U.S. Census Bureau. Here is what his graph showed.

Age	Net Worth	Net Worth (excluding Equity In Own Home)
Less than 35 years	$      6,676.00	$4,151.00
35 to 44 years	$    35,000.00	$14,226.00
45 to 54 years	$    84,542.00	$25,006.00
55 to 64 years	$  148,964.00	$45,447.00
65 years and over	$  170,516.00	$27,322.00
65 to 69 years	$  194,226.00	$48,921.00
70 to 74 years	$  181,078.00	$31,823.00
75 and over	$  155,714.00	$20,366.00

Net worth is total assets minus total liabilities. It has nothing to do with your income except the portion of your income you are able to save and invest. To think that someone nearing retirement age only has, on average, $45,000.00 in total net worth should frighten the pants off of you. If you want to conduct a quick reality check, take a sheet of paper and create the following columns.

Assets		Value		Liabilities

Write down the name of the asset, the value, and the remaining amount owed. Do this for each asset you possess that you consider having value. For example, items such as your home, vehicle(s), or the jewelry that you inherited from your grandparents all have value (basically your big ticket items). Your clothes, small appliances, and other consumables should not be shown on your list. At the bottom of the page, add up the values and liabilities. Then subtract your liabilities from your assets to determine your net worth. What you own minus what you owe equals your net worth. If your net worth is greater than the recorded net worth in Todd Campbell’s table for your age group, then you are on the right track. However, if you are equal to or less than the net worth for your age group, then you have some work to do.

Before I get into the core of this message, I want you to understand that credit and the debt that remains after the satisfaction of owning the item has faded, is not the way to build wealth. You cannot build wealth by owing someone else interest. Wealth must be measured as a product of accumulation and, as long as you are mired in the muck of debt, you will always find it difficult to build wealth. In the beginning I mentioned that I used to believe that in order to get ahead I needed to establish good credit. What I meant by that is I believed that having a good credit score would open up the doors to success.

Understand this: having a high FICO score only opens up the doors to a greater potential for failure. A FICO score is nothing more than a record of your interaction with credit. If you misuse credit, failure is sure to follow. But what is a FICO score and is it really THAT important? Thirty-five percent of your FICO score is your payment history. The most important thing to a creditor is whether you've paid past credit accounts on time. It is the single most important factor in the calculation of your FICO score. The second most important factor (thirty percent) is the amounts owed on those accounts. Less important, but still a factor in your score is the length of credit history (fifteen percent), the types of credit (ten percent) and finally how many accounts you have opened in the recent past (ten percent).

So it is first, having credit accounts followed by how much you owe on those accounts. Then it is how long you have used credit followed by the mix or types of credit accounts and, finally, how many new accounts you have opened and for what length of time. A creditor is not interested in your net worth or accumulated wealth, he or she is simply interested whether do you have a good record of paying your bills. Put another way, what is your debt to income ratio and how long have you been interacting with debt? That’s all that really matters. You can have a million dollars in the bank, but if your FICO score is low, you will not be advanced credit.

Your debt-to-income ratio is determined by taking all your monthly debt payments and dividing that figure by your gross monthly income.  The result, your debt to income ratio, is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. Never mind the fact that you could have a million dollars sitting in the bank. They are measuring wealth by income, which is a fallacious measurement.

In addition to the relatively low net worth in America, many people have developed a caviler attitude towards credit and a laissez faire mentality concerning debt. Having a caviler attitude (not respecting the damage that the over use of credit can do to your ability to build wealth) and a laissez faire mentality (a willingness to let things take their own course without interfering) results in many people depending on government programs in retirement. Social Security is a Ponzi scheme concocted by the government and sold to the American people as a social safety net, yet it creates government dependence and offers a false sense of security, but that is another discussion for another time.

Americans have become desensitized to the damage easy credit has inflicted. Most people see it, even more experience it, but only a few seem to be able to stop it. As a result, many people use credit to attain consumable products, services, and experiences that once consumed are gone, but the residual cost of those items remain for years into the future. Even a college education does not guarantee that the income you earn will be worth the debt you accumulated through college loans. Keep this in mind. Consumable products cannot make payments, services cannot pay interest, and memories cannot produce a return on investment. That is why prioritizing your income is critical. Obligations first, then necessities, followed by commitments. If you have extra financial resources after that, then by all means, enjoy the extras that life has to offer, but reversing this order by using credit to have the things you want will result in financial failure.

You net worth is a product of your ability and willingness to build wealth through accumulation. Only in accumulation do you find wealth. Income is a tool that contributes to wealth building, but it is not a true measurement of wealth.  Wealth is not measured by what you owe, it is measured by what you own and what you own are those things for which you owe not. When you commit future unearned income to products, services, and experiences that produce gratification in the present, you put at risk your ability to build true wealth. The use of credit to artificially inflate your income so you can afford present pleasures with future dollars will always lead to regrets.

The single greatest way to build wealth is to eliminate debt. To do this you must eliminate, or severely limit, the use of credit. Credit is not a gateway to success, it is a fool’s paradise, a great deception that entraps more people than it frees. Is there appropriate uses for credit? There are, but you must be as wise as a serpent and as harmless as a dove. What does that mean? That means use credit sparingly and don’t desire produces, services, and experiences that you do not have the financial means to purchase. Remember: what you own, you own; what you owe on, owns you.

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[i] Americans' Average Net Worth by Age -- How Do You Compare? by Todd Campbell, May 17, 2015 @ 6:03 AM    http://www.fool.com/investing/general/2015/05/17/americans-average-net-worth-by-age-how-do-you-comp.aspx accessed August 24, 2016 @ 12:25 PM

Its A Matter Of Priority

Have you ever missed an opportunity to increase your financial position because you did not have the resources necessary to capitalize on said opportunity? There is merit to the phrase “It takes money to make money.” However, for many the excuse is “If they quit takin’ what I’m makin’ what I’m makin’ would be workin’ to make me more.” The inability to build wealth is often blamed on outside factors rather than ourselves. It has become passé to take responsibility for our own inability to build wealth. We like to blame the government, corporations, and the 1% for reducing our ability to have money to make money, but the real culprit is actually our priority system.

I have come to this conclusion. If I can legally take money away from the government, thwart the efforts of corporations to separate me from my income, and participate with the 1%, I can advance my cause to build wealth. These three fundamental actions are all you need to increase your ability to build wealth. First, keep as much money away from the government as legally possible. Notice the optimum word is legally.

The Income Priority strategy that I write about in my book, Simple wealth Building Strategies, starts with funding your Obligations. Obligations are financial “must haves” that are directly deducted from your paycheck. That means income taxes of course, but it also means fully taking advantage of tax-favored accounts (such as 401k’s, 403b’s and HSA’s) and selectively using company sponsored benefits.

If I have to rank the priorities within the Obligations category, I would say Income Taxes first, Company Sponsored Benefits next, and 401k/403b third. Most people who have medical benefits through their employer can choose a high deductible health care plan with the option to fund a health savings account, otherwise known as an HSA. Ironically, when you choose to prioritize your 401k and HSA in the Obligations category, you essentially put your investments ahead of your income taxes. That’s because tax favored accounts can significantly reduce your taxable income and actually give you the money you need to make more money.

This single action of funding your 401k and HSA directly contributes to the second action you need to take in order to build wealth. Thwart the efforts of corporations to separate you from your money by keeping as much money away from yourself as physically possible. Believe it or not, with one single action you can accomplish both of these objectives. Simply make it a priority to shelter money in tax-favored accounts. That’s it. Company sponsored retirement plans are the best place to hide money from the government, but these plans also keep money physically away from you by reducing your spendable income.

Taking advantage of tax favored accounts that are deducted directly from your paycheck is like taking a spending cut. Keep in mind that with less resources to spend, you must become more diligent about budgeting the resources you do have to spend. That is why I advocate using the O.N.C.E. Priority system. Chapter one of my book Simple Wealth Building Strategies fully explains the importance and process for prioritizing your income. The three most important actions you need to take (legally take money away from the government, thwart the efforts of corporations to separate you from your income, and participate with the 1%) can be accomplished with one comprehensive action. Take advantage of tax favored accounts.

To give you an idea of how tax favored accounts accomplish these three actions, consider the following example. Let’s assume a 50-year old woman who is planning on retiring at 62 implements the actions discussed above. She has an annual income of $71,750 that increases at 2% a year. Her strategy assumes that she will live about 30 years in retirement and wants to have 65% of her current income. Her estimated Social Security Benefit is about $1,639. She currently has $17,549 in a retirement plan and earns a modest 9% rate of return. The inflation rate is 3% a year. Her company matches 100% of the first 4% of her salary.

Just by making her 401k a priority, she can legally take money away from the government (at least in the present), reduce spendable income which reduces the stress of corporations trying to separate her from her money, and she can participate with the 1%. By doing the same thing, you get to ride the wave of the 1% while withholding your money from the government and not allowing corporations to interrupt your plan. If she changes her 401k contribution from 6% to 18% her results increase dramatically. Taking it to the next level, maxing out her contributions to her 401k at 33% increases her ability to participate with the 1%. The image below shows the results of the first year.

At 18% of her income, she can legally take over $3,200 away from the government. This money can be used to build greater levels of wealth. The 401k gives her the ability to use the government’s money to build wealth. She has also reduced her spendable income by over $15,700 which means that corporations have less influence over her plan because she now has to be more diligent about her spending behaviors. At 33% of her income, she can legally take over $4,900 away from the government. She has also reduced her spendable income by over $19,000 which means that corporations have no influence on her plan. One action, three significant results. It starts by having a plan to prioritize your income.

Let me show you how having a financial strategy can increase your wealth. How does participation and executing a strategic plan differ? Consider the example. The same person, using the same assumptions, executes her plan for the next 12 years. At 6% of her income (the participation rate), she amasses just over $215,000 and has a monthly annuity equal to her monthly Social Security Benefit. Her monthly Social Security Benefit is estimated to be $1,639 and her estimated monthly annuity is $1,678. However, making the 401k a higher priority, she saves over $414,000 and has an estimated monthly annuity of $3,230 which is nearly 2x her monthly Social Security Benefit. If she maxed out her 401k (the strategic plan), she would amass over $663,000 and could expect a monthly annuity of $5,170. Combined with her monthly Social Security Benefit, she would have an annual income in retirement of $81,700.

There are those who will argue that no one can save 33% of his or her income. I can tell you from personal experience, you can if you execute the right strategies. When you have prioritized your income according to the O.N.C.E. system, you open the door to take advantage of so many more opportunities. You have to lay the foundation of solid money management behaviors. The best way to do that is to learn from those who have accomplished what you want to accomplish. No process or strategy transfers from one situation to the next perfectly so you will have to determine which strategy is of more value and execute that one first. Once you get started, you will accomplish more than you imagined.

What you do today will have a direct impact on where you end up tomorrow. In a world of uncertainty, having a strategy for building wealth is a necessity. As a financial stability life coach, I wrote Simple Wealth Building Strategies for those who want to develop a comprehensive strategy for building wealth. Wealth is less about how much you make and more about how you think about money and what you do with it. It is behavior that is predictive of a person’s ability to turn the average income into a lifetime of wealth. Income is a poor measurement of a person’s wealth. Wealth is measured by accumulation of financial resources. You can earn a million dollars, but if you fail to preserve a substantial amount of that income, you are by no means wealthy. Wealth building must be a priority over material possessions and physical experiences. If you get this wrong, you have missed the entire reason for earning an income in the first place.