|
The four measures of financial success
If you want to do well financially, you must first understand what it is you have to achieve. It's not just a matter of making more money. Instead, there are four factors you must consider.
These four measures determine whether you are likely to be rich or poor over the long term. They are slightly different from what your average accountant will measure. That's because there's more to financial success than just your balance sheet. The points are outlined below.
Your net assets
An asset is something of value that you own. It is yours if the proceeds of its sale would go to you. A liability is something of value you owe to somebody else. Usually, a liability also becomes an expense in the form of interest payments.
Typical examples of an asset include a house, a share portfolio, cash in the bank, or a successful business. Typical examples of a liability include a mortgage, a credit card debt, or a personal loan.
Your net assets are the value of your assets if they were sold today, minus the value of your liabilities if they were called in today. The figure you get when you do this calculation is what's typically referred to as your wealth.
Your net income
This is the amount of money you have coming in over a year, minus your expenses over a year. Income includes things such as salaries, dividends, interest and business profits. Expenses include debt payments, bills, clothing, rent and anything else you spend money on that is to be consumed.
If you have more money going out in expenses than the income you receive, you will have negative net income. This is a situation many people find themselves in.
The amount of time you spend working
This is a measure of how many hours in a typical week you spend working in order to secure your income and your assets. Because work is generally understood to be something we'd rather not be doing if we didn't have to, it is a cost to us. Despite this, it isn't usually measured on a person's balance sheet as prepared by an accountant.
Examples of work include paid jobs, time spent running a business, time spent organizing paperwork to manage assets, and time spent on tax matters.
Your exposure to risk
This is a measure of how likely you are to lose your assets or your income. Often, people who appear very rich have done so at great financial risk. They soon find they are unable to sustain their assets or income in the face of such risk, and lose the lot.
A recent example of high risk wealth was that generated in the dot-com boom of the late 1990s. For many, such wealth disappeared as quickly as it was created.
The position you want to be in
Looking at these four factors, it's not difficult to determine what the ideal position to be in is. A truly financially successful person would have:
- High net assets
- High income
- A small amount of time spent working
- A low exposure to risk
The position most people are in
Unfortunately, most people find themselves at the opposite end of the scale. The average working person would probably look something like this:
- Low net assets - perhaps some equity in a house which is owned mostly by the bank and generates no income.
- Low or negative net income - probably earning a salary which never seems like enough and quickly evaporates into tax and debt.
- A large and growing amount of time spent working because...
- There's a large exposure to risk. If they lose their job, their mortgage and other debts will eat them alive.
Try to figure out honestly with yourself where you sit on the scale in each of these measures. Now you know where you want to be, look for your weak points and work on ways to improve them.
 | Emotions are like muscles, you need to work them out | | It’s amazing how much of our lives are controlled by our emotions. In fact, it could be said that pretty much everything we do is in pursuit of some sort of emotional comfort. If you’re hungry, lonely or cold, your emotions are going to let you know by making you feel miserable. This is generally a good thing. |  | If investments become cheaper, and you’re a buyer, that’s a good thing | | In the last few years, stock markets around the world have been hammered. Currencies have also fallen to historic lows. People see their portfolios down and are running scared. |  | Don't fall into the habit of finding excuses not to take action | | Sometimes it's good not to take action. It's just not called for under some circumstances and can actually make things worse. I've written about this before. |  | The best way to influence the behavior of others | | We are all dependent on one another. We need other people and they need us in order to live the best lives we can. But other people are generally outside of our control. So one of the biggest problem anyone faces is how to get others to behave in the way we want them to. | | What to do when you've made a life-shatteringly bad decision | | Let's face it, despite our often high opinions of ourselves, we're all human really. There's not a person on this planet who hasn't made an incredibly stupid decision at some stage that's had life-changing consequences. You'll certainly make such a dumb call yourself some day, as will I and everybody else. | | It's extremely difficult to change people | | Most of us have someone in our life we'd like to change. It might be a lover, a child, a boss, or a neighbor. We try every trick at our disposal to meet that end, but in general we are likely to fail. | | Throw yourself in the deep end | | We're all afraid of things we haven't experienced before. We'd like to take a more responsible job, but we're not sure we can deal with it. We'd like to meet new people, but we're afraid that they won't like us. We'd like to try out a new activity, but we're worried about making a fool out of ourselves. |  | If you don't know, say so | | Three of the hardest words for many people to say are: "I don't know". In fact, many of the problems in human history have been caused through our aversion to these words. How come? |  | The transition periods are often the most difficult | | Someone I know quite well once discovered that his wife of five years was seeing another man behind his back. He found out when she suddenly announced she was leaving him for her new beau. He was out of town at the time, and when he returned he found most of the furniture in his house missing. | | Six things likely to make you happier in the long-term | | I've previously looked at how to get a short-term "hit" of happiness. Now I'll explore the more important subject of long-term happiness. |
New articles are being added all the time, so make sure you bookmark Paul's Tips and come back.
|
|