What is your worth? Financially speaking, of course.
Three money mindtricks to last you a lifetime.
Steven here from munny.club, a weekly newsletter where I share a different perspective on personal finance concepts. If this doesn't interest you or you don't find it valuable, you can unsubscribe at the bottom of this email. If you have feedback, just shoot me a reply!
Ok, I have hinted at this idea for a while now, but today's topic is net worth. This email is going to be a bit longer as I’m excited about the topic and packing in a bunch of different but related things. Let me know if they resonate with you, if you agree or disagree, or have any thoughts!
The photo did so well last time I’ve added another. I hope to work through the entire catalogue of money photos.
In this email there are three small but powerful ideas that build upon one another, along with a handful of numbers.
1. View your net worth as a ratio, not a dollar figure.
I want you to stop thinking about your net worth (total value of your assets minus your debt) as a dollar figure. Like I talked about before, the dollar value lacks any context: $10,000 is far more valuable to a student than to a high roller. Because the cost of living is so much lower for the student, they can make it last so much longer. A $10,000 net worth looks better in that scenario.
For simplicity’s sake, we will refer to net worth as savings + investments. You can’t live off the value of any of your purchases.
Your real net worth is how long you can afford to live off of your assets. Think of your net worth as a ratio, depicted as Savings:Expenses. How many multiples of your expenses do you have saved? For example, you may have saved $100,000 but is that a ratio of 1, 4, 5, or 10? These are vastly different despite being the same dollar value.
So when thinking about your net worth or calculating it, it should be in years. For example, you might say your net worth is currently 4.5 years of expenses. This may also make you feel a bit more comfortable talking about money with others.
2. A 50% savings rate is a magical threshold.
The next two points are numbers based, specifically two thresholds that once you hit make a huge difference. If you manage to get to a 50% savings rate, then for every year you work, you are able to save a full year’s worth of expenses. This took me awhile to wrap my head around, but 50% savings means you’re only able to spend the remaining 50%.
Savings == Spending. Magic.
One crucial point though: the way to hit a 50% savings rate is not to spend less. It is to earn more. This is a slight distinction and ties back into the lifestyle inflation. Once you find the right level of lifestyle for you, a stable burn rate, you focus on the earning part of the equation. Sometimes this means simply being patient, or finding new ways to earn. Life is not a race. There is no point endless depriving yourself by cutting expenses to hit the 50% mark. It’s not sustainable.
3. The 10x ratio tipping point.
When we talk about your net worth ratio from point one, there is a tipping point at the 10x mark. When you have 10 years worth of expenses saved up, a conservative 5% annual growth rate means each year your net worth grows 0.5 years of expenses. Just like that. Every two years, just from growth, you are getting 1 year of expenses. Combined with savings, if you get to the 50% savings rate, you’re now growing 1.5 each year. This is the fast track to wealth.
It’s probably worth talking about a few threshold ratios for your savings. Just randomly, 10x is a solid amount savings. You get to the tipping point as mentioned above. The real, lofty target should be 20x. This is the “final goal” because at 20x each year your net worth grows by 1 (ratio). In theory, you are done saving now. As long as your income == your expenses, you could let it grow on its until you stop working. Note: I don’t necessarily recommend this.
If for the rest of this email newsletter you learn/remember nothing else, these 3 key points are enough to change how you think about your savings to make a lasting impact.
If there is anyone you think you benefit from this, please forward it to them!
"What should this newsletter cover next?"
Reply to this email or leave a comment. Tell me what money things you have on your mind.
I read every reply. Thanks!