How Rich Are You: Determining Your Wealth

 have been talking a little bit about financial independence in my previous posts and I mentioned in one that the first step in the journey to financial freedom is to detemine exactly how much money that will be, in order for you to know you’re there.  This number sometimes seems overwhelmingly large when we think about it in such broad terms, I mean, I want so many things that a million dollars doesn’t even seen to appeal to me, anymore.  So, this post will help you detemind a monetary figure of what it will take for you to technically be financially free, based on your lifestyle, today. 

The definition of financial wealth referenced by Kim Kiyosaki, wife of millionnaire entrepreneur, Robert Kiyosaki, in her book “Rich Woman” is: 

“a person’s ability to survive X number of days forward”. 

Basically, what this means is that measured in days, you are as rich as you are able to survive, while maintaining your current lifestyle, if you were to stop working. 

Here is the simple formula to calculate your current financial wealth and it will also give you the figure you need to know to strive for, to attain financial freedom.

Step #1 – Make a List of All Your Monthly Expenses

Example: 

Mortgage    $2500
Property Taxes    $300
Home Insurance    $150
General House Expenses (utilities, etc.)    $350
Car Payment    $550
Gas    $150
Meals & Entertainment    $500
Misc. Purchases    $500
Magazine/Newspapers/Books    $50
Travel/Vacations    $250
(and many others that are personal to you)

The key here is that this is different from a budget statement.  Be honest with yourself on your spending amount.  What you want to do is list your current lifestyle, not trying to cut things out to fit what you know you should be spending. 

Step #2 – Determine How Much Money You Currently Have

This should not include your employment income because, remember, financial freedom means that you can maintain your lifestyle, without having to pay for it through working and, thus, you only work if you want to work.

These things will include:

Savings
Stocks that could be sold or liquidated immediately
Cash Flow from Assets (i.e. you rent an apartment building and cashflow X amount of dollars each month from it)

*  Note:  Do not include things like your car or house that is paid-off or jewelry, etc., because if you were to sell those things, your current lifestyle would not be maintained and that would defeat the purpose of this goal.

Step #3 – Compute

Now, divide the total amount of money you have by your total monthly expenses. 

The figure that you get (i.e. 4.5) would translate as the number of months you are wealthy.  In other words, if you were to stop working, today, you are rich enough to maintain your current lifestyle for four and a half months. 

Therefore, the formula is simply:

Savings (or available cash) + Income coming in without you working / monthly living expenses = Your Wealth 

So, if you’re like many people who don’t have income coming in that is not their employment income (i.e. they trade their time for money), then you have a missing piece in the formula. 

You  now also know how much money you need on a monthly basis to be coming in without working, in order for you to be deemd financially free.  It’s not so bad, right?