Wealth Is Determined by How Much You Spend Not Your Income
Have you ever said to yourself "If I got that promotion everything will be great"? While it may seem like a more income is the answer to financial difficulties, the truth is that wealth is not defined by our income. The best measure of wealth is the difference between our income and our expenses.
It is much easier to determine wealth for a company because every expense is counted and subtracted from income to calculate earnings. This earnings number defines the value of the company. For publicly traded companies, this value is typically around 15 times earnings. That means, that investors are willing to pay 15 dollars upfront for every dollar that the company makes each year.
You can determine your personal wealth by following the same steps used to determine the wealth of a company. Take your income each month and then subtract out every non-discretionary expense. Monthly expenses can be broken down into two basic types, discretionary expenses which are the purchases that we have control over and non-discretionary expenses which are the bills that we must pay without exception each month, and you will likely never stop paying (i.e. mortgage, car loan, gas, taxes, insurance, budgeted grocery expenses, etc.). When you subtract your non-discretionary expenses from you income, the number that is left over is your potential monthly wealth. This is the maximum amount of money you could have at the end of the month if you did not make any special purchases, do any special activities, or spend money in any other way.
If this number is significantly higher than you thought it would or should be, or higher than you end up actually saving each month, then you should take a closer look at your discretionary expenses, and more importantly, take a closer look at the personal goals that you have set for your finances.
It is much easier for a company to keep spending in check because the company is money oriented. That is the focus of the company and that is all that the company is interested. For individuals and families, we have to balance the focus of saving money, with living. Individuals and families are also in the business of having joy. We earn an income in order to support our other goals. Goals of having a family, being happy, healthy, etc. While these goals are important when too much focus is placed on them, the consequence is that our savings and investments suffer.
Your true wealth only become apparent when non-discretionary expenses are subtracted from your income. This wealth is the only means you have to finance every goal you may have in life. For every decision made with this money, there is a consequence. If you choose to take the family on vacation, the consequence is there is no money left for savings that month. If you choose to invest the wealth, then there is no room for a vacation. Now, no one wants to run their family or personal life like a business; there would be no joy in it. The key to a financially successful life is in a good balance. Make sure that you have set goals for both enjoying and investing your wealth and then make a plan to accomplish both; and remember that the key to having wealth well into the future is not in having a greater income but in properly managing your goals.