The words you say daily show your thinking pattern. Coaches teaching money management, notice a pattern. Each of us uses formulas that reveal how well we stand financially. T. Harv Eker* claims that he only needs 5 minutes of conversation to determine whether someone is poor or rich.
What is the difference?
You have heard the phrases: Keep money for a rainy day, the rich are greedy, disgustingly rich, what do you think I’m made of money like this does not happen to us, the first million you have to steal. These formulations fall on the lips of people who are not good at managing money.
Another thing is what you pay attention to, what you ask about:
“After selling a business, how much is your net worth now?” You ask such a question, or rather:
“What is your salary?”
People who consciously manage their money pay attention to net worth. Others focus on earnings and the visual aspects of being wealthy – like a beautiful home, a great car.
Why is net worth so important?
The amount of earnings is not equivalent to net worth. You can always exchange your net worth for cash. Your earnings do not depend only on you. You have a direct influence on the creation of net worth.
What is net worth?
When you add the value of what you have (current value) and cash, then you subtract your liabilities from that value. The result will be the value of your net worth.
What affects the net worth?
According to T. Harv Eker, 4 factors make up net worth. Those are:
- Income. Here we have pay from work, incomes from the company and passive income
- Savings. What you earn you spend on life, pleasure, and savings. You will increase the level of your savings by spending less.
- Investments. When you collect enough money, you can invest. The better the investment choice, the higher the return on investment and the greater the net worth.
- Simplicity. Saving and investing money is possible only if you do not spend all your earnings on life needs and pleasures. So it’s important to keep your life at a level that you always spend less than you earn.
The last point is often difficult to implement. Most often, the more you earn, the more you spend. When higher earnings come, expenses will be found quickly. The furniture in the kitchen is replaced, the old car is replaced with a new one, the apartment with a house. There are expensive vacations and other pleasures.
What should be the first step towards net worth?
First, calculate your net worth value. Add together: cash, savings, the current value of the car, the current value of the property you own, if you have a business – its current value. Then sum up the loans, credit cards, and other liabilities separately. Subtract the number of liabilities from the first sum and write down your result. Next, write the target net worth value. You can write these two amounts on the chart and view them every few months. What you focus your attention on is growing. It will be similar to your net worth.
*) T. Harv Eker wrote an interesting book about thought patterns: “Rich or poor. Just mentally different. ” The Eker’s organization also conducts training helping to control its thought pattern and teaching how to manage money well.