Measuring Wealth | The Probabilist . com

Measuring Wealth November 23, 2006

Posted by The Probabilist in : [Articles], Financial Literacy, Society, Independence, Wealth, Work, Assets, Investing , trackback

When it comes to riches, most people set goals like acquiring a million dollars. My goal is to be financially independent. It’s not that I wouldn’t mind getting a million dollars, but I’d still use it to become financially free, which sounds to me like a much smarter goal in life when it comes to personal finances. To some, or maybe even most of you this concept might be unfamiliar, so what are the major differences between these two goals or perspectives in detail?

The underlying question lies in how you define or measure wealth. Most people simply measure it by the amount of money in their savings, total net worth, or monthly/annual income. With measures like these it’s no wonder why about 90 percent of the population:

define their wealth by the money they have/make.
conclude that only by working harder, their income will rise.
believe that investing and entrepreneurship is hard and risky.
pray that their savings will pay for all their retirement expenses.
keep on playing the lottery to some day get their million bucks.
trust their money to strangers who diversify, diversify, diversify.
borrow money to buy cars and houses to keep up with the Joneses.

Most people do all of these things and it’s socially the “normal and sensible” way to live out your life. But nobody has actually told me why it supposedly is, and if there are any other options. After reading a few books I realized it all boiled down to how you measure wealth - and therefore setting goals according to this improved perspective.

Wealth is measured in time. That’s all there is to it. It’s so simple, yet it has the potential of helping you discover numerous new doorways and paths for you to explore. Ask yourself this question: If you stopped working today, how long could you stay within your current standard of living? In other words, if you did nothing but pay the same bills you usually pay, then how long would it take before your money ran out? Don’t add the option of borrowing money. If your answer to this question is below six months and it’s not improving then this article is specifically aimed for you.

My own answer to that question is approximately 24 months at the moment. But it’s not easy to calculate and estimate since I’m a student and have fluctuating expenses depending on the month and studying is not something I’ll be doing indefinitely. (Hopefully ) Additionally, my passive income (income generated without effort) is constantly moving upwards so my wealth in time is improving each month. When your passive income is greater than your expenses, you’re financially independent, out of the rat race, retired, free to use 24 hours of the day on whatever you want for the rest of your life. And to me this would be used to live my life purposefully.

The greatest part about this perspective and goal setting is that it gets easier and easier the closer you get to financial freedom as you’ve got both your regular and your passive income surpassing your expenses. You then continuously load what’s yours to keep into your asset column for more passive income or other streams of income - like a part-time business. If this is getting over your head, stay updated on this blog.

The bottom line is that if you keep doing what most people did in the industrial age - get a degree, work, buy a home, raise a family and retire at age 65, then you’ll probably also feel awkward handling money and your personal finances. These are the kind of people that win the lottery and end up feeling miserable and filing bankruptcy a year or two later. Wealth is a phenomenon just like most others as it doesn’t come to those who aren’t ready for it and show financial intelligence to handle it. And a partial reason why this occurs is that most people don’t even think through how to define and measure it.