Most people measure their wealth by looking at the value of their house and cars and other things they have. They see value and wealth in their “stuff”. Of course, you can include the value of your pension fund and other investments you have. This is definitely a valid way to measure your wealth (provided of course that the assets you’re taking into account are actually paid off), but I’d like to propose a new way to measure and track your wealth.
A new perspective
It all comes down to one simple question. How many months could you survive without a job?
Another way to look at it is to remember that you could be retrenched or fired very easily – whenever your current employer decides that they no longer need you. How long can you survive without any income?
How to calculate this?
Firstly, you need to know what you monthly living expenses are. For this you need a budget. You can manipulate your budget a little as not having a job would definitely cause you to priorities your spending and you would almost certainly immediately stop all frivolous spending. Don’t forget about your debts as you would still need to be paying these! So know how much you need each month to service debts and survive?
Then, how much money do you have available? Think of any savings you have, or money that you could access. Only take into account money that is actually your own. By this I mean that you could possibly access a lot of money from your home-loan, or you could take a personal loan; but that is simply debt. How much money do you have that is your money and that you can access now?
Retirement and pension funds have rules about when you can access your investment. So really think about your situation right now. Don’t forget any other income you may have that would not be affected, such as rental, commission, royalties, etc. (We’re not looking at selling assets in order to survive, rather just look at cash and investments)
This excise will give you a clearer view of where you are. You may see that you can actually survive many months without your income, but at the same time this could highlight to you if your finances are in a terrible state. Perhaps you won’t be able to survive even just one month.
When you lose your income, it doesn’t really matter what house you live in, what car you drive or how many diamond rings you have. These things can’t find you food on a day-to-day basis. Having lots of debt makes the situation worse and you could really end up in an awful situation!
Whatever stage you may be at, set yourself a goal to improve your situation.
0 months – This should be a HUGE WARNING sign to you to take charge of your financial situation immediately!
1 – 3 months – You are not in a great situation, but there is a little leeway should something happen regarding your income. Your situation is definitely not good.
4 – 6 months – You are probably better off than most people but don’t feel too comfortable here as things are still not great. You would most probably survive a job loss as you have some time to find a new job, but it would be a stressful situation!
6 – 12 months – If you are in this bracket then you should feel some relief that you could survive some tough financial circumstances. You are in a good position but don’t think about early retirement or that year of travel yet.
More than 12 months – well done, you are on your way to financial freedom! Don’t forget to keep checking your situation regularly and set goals towards the ultimate goal of Financial Freedom.