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