When most people talk about their finances they talk about how much money they want to make or have. Being "rich" or having a lot of income is a great thing, but there is far too little discussion about debt. If you make a million dollars but have two million dollars worth of debt you are actually in worse shape than 90% of Americans. In fact you are in worst shape than a person who makes minimum wage and has no debt.
If you want true financial freedom you must focus on both sides of the equation - generating income AND reducing your debt. When your total assets equal your total debt you are at a zero net worth. For those who have gotten to zero they know that this is one of the best places to be. If you don't think so yet, read the rest of this article and I bet you'll be convinced too.
When banks, financial planners and rich people measure the financial status of an individual, they don't look at how much money you have in the bank, they measure your Net Worth. Your Net Worth is measured by your total cash and assets minus your total level of debt.
Net Worth = Total Assets (cash, property and investments) - Total Debt (bills, car loans, mortgages)
If your total Net Worth is positive that means you are free. You could liquidate all your assets, pay off all your debts and you wouldn't owe anybody anything - ever!. If your net worth is less than zero that means that owe more than you have and you are forced to generate income to pay off your debts. With negative net worth you are not free; at zero you have options. Positive net worth means financial security.
Thinking about finances this way requires a change of thinking. Ponder this...
 |
Makes $1 million/year |
Makes $30,000/year |
| Main home = $2 million 4 bedroom mansion, $300,000 summer home in the Bahamas, 2011 Mercedes ($100,000), 2011 Escalade ($70,000), $100,00 worth of jewelry | Renting $3 bedroom house ($1,500/month), 2005 Acura SUV, $1,000 worth of jewelry | |
| Total Cash | $100,000 | $3,000 |
| Assets (property) | $2.57 million | $1,000 |
| Credit Card Debt | <$500,000> | $1,500 |
| Investments | $100,000 | $1,500 |
| Total Assets | $2.27 Million | $0 |
The guy on the left makes $1 million a year, has 2 homes, 2 new cars and a drawer full of bling. He must be the baller, right? Not necessarily. Assets are only half the equation. When you look at the debts you will see that the guy on the left is a train wreck waiting to happen.
|
|
 |
| Money Owed on Homes | <$2.16 Million> | $0 |
| Money Owed on Cars | <$150,000> | $0 |
| Total Debt | <$2.31Million) | $0 |
| Net Worth = Assets - Debts | <$40,000> | $0 |
The guy on the left has less Net Worth than the average Black Man on the right. In addition he has so much debt that he better make $1 million a year for the rest of his life just to keep up his payments. If he loses his job he is bankrupt within a month. He is a slave to his job and can never quit. In fact, for the next 30 years he can't stop working, not even for a month. If he does stop his house will go into foreclosure, his cars will be repossessed and he will be forced to sell all his jewelry. Now THAT'S PRESSURE. Ask Terrell Owens about debt with no more income. Meanwhile the guy on the right is financially secure. No car note, no mortgage, no credit card debt. He is free to live his life as he pleases.
When you buy a house with 20% down payment you don't own anything. What you have is a 30-year debt. AFTER 30 years of payments, then you own a house.
When you buy a $100,000 car with a 5-year car loan you don't own anything. What you have is a 5 year debt. AFTER 5 years of payments, then you own a car.
When you buy $100,000 of jewelry you have nice bling but you will never be able to sell it for $100,000 if you needed to. you'll be lucky to get $50,000 for it if you needed to sell it for an emergency.
The man on the left is a slave to the bank. He stops working and the slavemaster will take away EVERYTHING
If you have money and you want to buy homes and cars, pay them off quickly. Never buy them using long term loans or credit cards. The sooner you pay them off the sooner they become assets and increase your net worth. The longer you have the loans open your net worth is less and your toys can be taken away from you by the bank.
Eliminating debt (getting to Zero) breaks the bonds of slavery
Having nice things and being financially secure is possible, it just requires a change in thinking. When it comes to money zero is not always a bad number.
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