A measuring stick for wealth

One of my all around favorite books relating to money matters is Rich Dad’s Guide to Investing by Robert Kiyosaki. I was expecting this book to be something similar to Benjamin Graham’s Security Analysis, an in depth discussion of what to look for in buying stocks. However, the book is not so much about investing as it is about the investor. And it was filled with good ideas that were novel to me.

The concept that most stuck in my mind was how Mr. Kiyosaki measured wealth. He teaches that wealth should not necessarily be measured in units of dollars, but in units of time. This measure of time looks at how long your assets can carry you, without the need to work. In other words, if you stopped working today, how long could you survive financially with the assets that you have?

To determine this, you need to do a little work and create both a budget of your monthly expenditures as well as determine your net assets (value of what you own versus what you owe). Say your household expenditures are $4,000 per month and you have net assets that total $12,000. If you quit your job today, your assets could carry you for about three months, before significant financial hardship set in. Your wealth measure would be 90 days as you could survive that long under your existing lifestyle without working.

The “work” that Mr. Kiyosaki encourages is increasing ones portfolio and passive income. Portfolio income includes things such as interest and dividends. Passive income includes things such as rental income or royalties. Mr. Kiyosaki believes that you should spend some of your time trying to increase these types of income. Let’s say you are successful and after ten years, you can generate $5,000 per month in net rental income and still have only $4,000 per month in living expenses. In this case your wealth number is infinite. You could expect to be able to continue your lifestyle in perpetuity without the need to show up at the office ever again.

A good definition of financial independence might be when your assets generate more income that your household expenses consume. You no longer have to work for money, because your money works for you.