When I ask people about their long-term financial goals, a common response is “I want to become a millionaire!” My follow up question is always, “So what does that look like?” I ask that question because most people respond, “I want to have $1 Million.” Having that much is great, but you still may not hit your goal. I want to focus on the definition of a millionaire. It seems that people have a misconception of the term. A lot of people view a millionaire as someone who has $1 Million or makes $1 Million per year. That’s not necessarily the case. A millionaire is someone whose net worth is greater than $1 Million.
Net worth is probably the most important personal finance number that isn’t talked about enough. Your net worth is equal to your Assets (What you own) minus Liabilities (What you owe, aka debt). This number should be the focus of most of your financial decisions in life.
Net Worth = Assets - Liabilities
Assets include your house, bank accounts, retirement accounts, car, and anything else that can be sold to someone. Liabilities/Debt include mortgages, car loans, student loans, credit cards, and anything else you owe someone.
Two great books about this topic are The Millionaire Next Door and Rich Dad, Poor Dad. They do a great job of explaining the importance of buying assets and reducing your debt. When I read them, I learned that most millionaires are self-made and did not inherit their wealth. The most successful people lived below their means and invested in assets throughout their lives. Another great topic is how to invest in assets such as stocks and real estate that will pay you back over time. Boats and cars don’t pay you back unless you sell them. They also go down in value over time which means that mere ownership decreases your net worth.
This is how people measure when they can retire. Anyone can retire when they can live off their assets for however long they expect to be alive. Retirement doesn’t have to be based on an age that you think will be a good time to stop working. It is based on the ability to pay for your expenses without needing employment.
That’s why I want you to sit down and calculate your net worth. Make it a priority in your life. Think about how your financial choices impact your net worth. If you do that, you will set yourself up for long term success. You can also figure out exactly what your wealth will look like when you become a millionaire.
Mike Zeiter, CPA/PFS