1. Ignoring your money

Don’t take the “invest-it-and-forget-it” mentality too far. Also, don’t have too much of your money in low-yielding savings accounts.

2. Buying too much house

The bigger the house, the more you’re going to spend in mortgage payments, upkeep, taxes, and everything else. So, although the equity in the home will help your net worth grow, the money spent keeping it up will take away from your net worth. With all the dumb mistakes my wife and I have made, we made awesome choice when we bought our house. We bought what we could afford but were able to find a house in a great neighborhood. Our house is now worth about 60% more than we paid for it nearly eight years ago.

3. Driving too much car

No comment. This is a no-brainer.

4. Paying the IRS, not yourself

Take advantage of all the tax-savings vehicles that are LEGALLY available to you. Again, this is a no-brainer.

5. Always getting what you want

A lot can be said for practicing self-discipline in your spending. A lot of times we want things only because they are new or popular, which means we’re going to pay more for them. I remember people paying $10,000 more than sticker price for the Mazda Miata when it first came out. Now look at how many of them you see out on the roads. If we can force ourselves to put off buying these things, the newness will wear off and the price will decrease and we can buy them for a lot less (or we will have moved on to something else).

6. Letting your assets linger

Balancing your net worth with your cash flow.

7. Letting your debt lie

Common sense here. If you have debt, you want it to be at the lowest interest rate possible. You also don’t want to carry credit card debt or consumer debt any longer than you have to.

This is all common sense stuff. You just have to do it.

Now watch – a blogger will turn this into a seven-day “series.”

Why is it fun? Because we paid off our credit cards last year and all the money that was going toward those cards is now helping us build our net worth. It’s amazing how things tend to build on each other. Instead of paying someone else for the use of their money, someone is paying us! In other words, we have reached the point where our money is helping us grow our net worth. Compounding is awesome! I love it!

No matter where you are on wealth-building road, you NEED to keep track of your net worth. It’s not hard. In fact, I even put together a general Excel spreadsheet called the Statement of Net Worth that you can download and put to use. There are tabs for each month for the remainder of the year. I even linked the cells from month to month so you don’t have to do a lot of repetitive work. If you change a number in a cell, the spreadsheets in the months AFTER that sheet will change too. You will have to manually enter any new categories that you might add.

The important thing is to get started now. I’m here to help if you need anything or have any questions.

Here are lots of other posts related to this topic:

Building Wealth Using Other People’s Money

How an Emergency Fund Can Save You Thousands Each Year

Financial Planning for Generation X

AFTER You Get The Job

How to Boost Your Cash Flow in Two Easy Steps!

How-to…Personal Finance Edition – Helpful tips from LOTS of different bloggers.

How to Determine If You Are “Wealthy”

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

Analyzing Your Financial Statements with Ratios

We all know that the rich are getting richer. It doesn’t take a genius to figure that out. However, are they getting rich at the expense of the lower and middle classes?

Doing some math, we can figure out that today’s GDP is around $12.46 trillion. To arrive at that number, I simply took the inverse of 1/152 (1 ÷ 152) and divided that number into $82 billion. Like this:

According to Federal Reserve’s 2004 Survey (PDF), the average household had a net worth of $448,200 (an estimate I think seems too high). This means the average net worth represents 0.0000035960% of the nation’s GDP, while Bill Gates’ net worth represents .66%. NOTE: this is a very rough estimate.

Finally, to put Rockefeller’s net worth in perspective, if Bill Gates’ net worth represented 1/65 of today’s GDP, his net worth would be…

Now I feel really poor!

The book gives an example of a woman who makes $125,000 per year and has a net worth of $690,000. Her RON would be calculated as follows:

According to the book, this number tells us that this woman’s household realizes 18.12% of its total net worth annually.

Is this is a good number or a bad number? Would you want this number to be higher or lower? The bigger the net worth is (the bottom number) in relation to income, the smaller the RON will be. In other words, the smaller the RON, the better (as long as the income is sufficient). I would think over one’s lifetime, the RON will be big in the early stages of life and get smaller as we age since our net worth should be growing and compounding over the years.

The author then goes on to make an important point:

For those in a higher income bracket, the lower the RON, the more economically productive the household is.

The typical millionaire who is a business owner or manager has a RON of 8 – 8.3%. That’s pretty low.

Another way to look at it…

Another way to look at the RON, is to take the inverse of the RON:

This tells us that the woman in the example has $5.52 of net worth per dollar of household income, while the typical millionaire household has $12.50 (1 ÷ .08 = 12.5) of net worth per dollar of income. So, based on those numbers, this lady isn’t doing that great.

To put this in perspective without giving you too many details, our RON is 46.33%, which means that we have $2.16 of net worth per dollar of income. It’s better than nothing but not nearly as good as it could be.

Related:

How to Determine If You Are “Wealthy”

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

Analyzing Your Financial Statements with Ratios

I say yes but I think people should be careful if they live in an area where property values have soared through the roof, which could indicate a bubble. Although we all want our net worths to be as high as possible, they should be a realistic picture of our financial situations otherwise the exercise is a big waste of time.

Take a look at this Family Net Worth Chart from page A8 of the Federal Reserve’s 2004 Survey (PDF):

To make it a little easier to read, I took the figures and multiplied them by 1,000 and put together the following table:

Median means that half of the households surveyed had a net worth above, and half had a net worth below the median. So, for the less than 35 group, half of those who took the survey had a household net worth of LESS THAN $14,200 and half had a net worth GREATER THAN $14,200. Notice the huge difference between the median and the average. The survey used real net worth, which is the difference between a families’ gross assets and their liabilities.

My wife and I are way above the median net worth for our age group (35 – 44) but below the average net worth for our group. That’s okay with me because we are on the young side of our age group. I fully expect us to be above average by the time we are in the upper end of our age group.

Where do you stand?

If you need help figuring out your net worth, I did a series of posts on net worth that might be helpful:

Related:

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

So, if you are 35 years old and your household income is 60,000 per year, your networth should be $210,000 [(35 X $60,000)/10 = $210,000] in order for you to be considered wealthy.

If you are 9 years old and you get an allowance of $468 per year, you would be considered wealthy if your net worth was greater than $421.

The theory behind this formula is that the older you are and the more money you make, the more wealth you should have. So, the number is relative for each person’s situation.

Now, what I can’t figure out is why they chose the number “10″ as the divisor. The book does not say. But, like anything, this is supposed to be a rule-of-thumb formula that is simple and easy to use.

Related:

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

1. It’s short and very easy to read. It can easily be read in one sitting as it is just a little over 100 pages long.

2. It’s a “get-your-feet-wet” kind of book. In other words, you’re not going to find answers to general personal finance questions. Instead, what you will find are 5 simple lessons that can help you learn to build wealth.

3. The Five Lessons are easy to learn:

• LESSON ONE – Decide to Be Wealthy
• LESSON TWO – Take Responsibilty for Your Money
• LESSON THREE – Keep a Portion of Everything You Earn
• LESSON FOUR – Win in the Margins
• LESSON FIVE – Give Back

4. The author gets to the point as he did in this passage on page 67:

An employee of mine desired a new car. It was too expensive for their income, but she was intent on convincing me that it was the right choice for her.

“My husband is about to get a raise. Why shouldn’t we have a nice car? Don’t we deserve it?”

Deserve it? She had just regurgitated the greatest marketing sham ever proagated on the American consumer – the result of years of advertising brainwashing. She deserves what? To find happiness based on something that will decay and lose value within a year, yet will continue to financially enslave her long after her long after her inatuation with the metal is gone? In the words of my teenage daughter: Is this a good thing?

5. The book has a resource section with Net Worth Forms and Cash Flow Worksheets that you can use. Or, you can simply go to TheFiveLessons.com and use the forms here and here.

Finally, the coolest thing about the book is the fact that 100% of the author’s profits from the sale of the book are going to the Christmas Box Foundation, a foundation the author set up after the success of his book, The Christmas Box.