What is Real Wealth?
Thomas Stanley’s most recent book, “Stop Acting Rich” explains there are two types of financial wealth—those who are income affluent and those who are net worth affluent. It would seem logical that having a high income would result in having a high net worth, but that is oftentimes not the case. The income affluent have terrific cash flow but very little net worth. Too often, the majority of their income is allocated to expenses. The net worth affluent typically do not have as high an income but are habitual savers. They spend much less than they make, and they pay off debt, have cash for a “rainy day,” and accumulate appreciating assets such as real estate, investments, and businesses.
The outlook for the next few years remains volatile markets and higher taxes. These are just a few of the factors that could lead to slower overall economic growth. When the economy gets rocky both the income and net worth affluent can thrive, but which of the two has the most flexibility should their income be reduced (especially through higher taxes) or eliminated? The answer is obvious— the net worth affluent have the foundation to “survive” and “hold on” by living off cash and assets until their income can be repaired. Most of us measure wealth in material terms, either as income or net worth, but the peace of mind that goes hand-in-hand with the net worth affluent is real wealth.
At the end of the day, we all want safety and peace of mind that the income and/or assets we have can provide us with the ability to enjoy life and provide for our families. In these incredibly volatile and uncertain economic times we all must begin to focus on building assets regardless of the size of our paychecks. Using excess cash flow to pay down debt, adding to our 401ks, and investing in our businesses will provide us with the most flexibility as we approach retirement, and this freedom can give us peace of mind in any type of economy.