Say it with me, ‘stuff happens’.

It is not a matter of ‘if’, but ‘when’ and ‘what’. Some of this stuff is a result of choices we make and some is just unforeseen. What I am talking about is LIFE. Someone gets sick, someone losses a job, the market tanks, kids, parents, pets, cars, houses, spouses ~ they come and go.

One thing you can control in all this is how well you build your financial foundation.

One big mistake that I see over and over again is people mistaking ‘making good money’ for financial stability. These are NOT the same thing.

Making good money relates to the amount of money flowing in every month. Financial stability relates to what you do with that money. Spend more than you make, over leverage yourself, and you create a financial disaster just waiting to happen. Spend less than you make, make good long-term choices for your money and you create financial stability.

So how do you tell the difference between ‘making good money’ and financial stability?

First, your monthly budget will clearly show that you are spending less than you make. You have, or are diligently working on paying off all consumer debt.

Next is your financial report card: Your Statement of Net Worth

Your Statement of Net Worth is everything you own less everything you owe. (Appendix 3a in the Wealthy Living Workbook)

Some general notes: Most of your ‘stuff’ does not have much value in Net Worth. That $5,000 leather sofa will fetch about ten cents on the dollar in the resale market; 1/10th of its value; or $500. Many people are surprised that the crystal vase that grandma said was priceless doesn’t fetch more than $30 on E-bay, or that boat that you paid $20,000 for sells five years later at less than $5,000. In general, unless you have an item that has true resale value, don’t include it in your Statement of Net Worth.

Here are the highlights for the difference between ‘making good money’ and financial stability. These numbers are derived from two real situations:

Who is the wealthiest?
Both age 55
1st: earns $250,000 per year; net $20,833 per month
2nd: earns $60,000 per year; net $5,000 per month

Most of my students jump at the ‘makes good money’ myth and pick the 1st.

Now let’s look at the Statement of Net Worth for each:

                                       1st ($250,000/yr)                                       2nd($60,000/yr)
Assets (Owned):
Home:                               $1,500,000                                                      $170,000
Car:                                    $ 120,000                                                         $ 15,000
Toys(.25/$1):                    $ 25,000                                                            $ 0
Jewelry & Furniture:        $ 50,000                                                            $ 10,000
Time share:                     $ 10,000                                                            $ 0
Emergency Fund:            $ 0                                                                     $ 30,000
Savings:                            $ 0                                                                    $ 15,000
Retirement:                      $ 0                                                                    $ 270,000
Total Assets                    $1,705,000                                                     $ 510,000

Liabilities(Owed):
Mortgage:                      $1,750,000                                                       $ 0
Car Loans:                      $ 135,000                                                           $ 0
Personal Loan:              $ 50,000                                                             $ 0
Student Loan:                $ 25,000                                                             $ 0
Credit Card:                   $ 25,000                                                             $ 0
Other Debts:                  $ 150,000                                                          $ 0
Total Liabilities           $(1,985,000)                                                       $ (0)

Net Worth                    $( 430,000)                                                    $ 510,000

As you can see, the 2nd is financially stable. When stuff happens they have the resources to respond. They have choices.

For the 1st example, something did happen. Their business failed and that ‘Other Debt’ was back taxes owed to the IRS. This family of four ended up living in their parent’s basement (at age 55). They had every opportunity to make good, long-term decisions with their money. But, they ‘made good money’, and did not prepare for when ‘stuff happens’.

You now have the burden of knowledge. What you do next is up to you.

Choice & Responsibility create Freedom & Empowerment.

Please check you score card today ~ Statement of Net Worth & Financial Stability