I don’t like the phrase ‘net worth’ – a person’s worth is very different from the difference between their financial assets and liabilities. As the phrase is in common usage I will have to put up with it!
Many people eager to retire focus far too much on growing the net worth number, thinking that they will be ready to retire when it hits $500,000 or $1 million or $10 million.
Income-generating and money-saving assets are vital for the Voluntary Worker, but as I explained in my earlier post on the Voluntary Worker formula, net worth is only one part of the equation. The rate at which you consume dollars is equally important, and in my opinion it’s the better place to apply your focus. Every time you learn how to spend less you are automatically accelerating the growth of your net worth, and through compounding that growth does some growing of its own.
I”ve used a bucket analogy before. Focusing on the level of water in the bucket (net worth) is OK, but a full bucket with a huge hole won’t stay full for long. If, on the other hand, you first attend to patching the holes, it will soon overflow even with modest income filling it.
Not a perfect analogy, but I think it has some merit!
Focus on the ratios of your work income, non-work income, total income and assets to your annual spending. Those are some of the most important financial ratios in your Voluntary Worker plans, and annual spending is the denominator that slashes them. Reduce the spending, and everything will look rosier in short order.
You may be thinking that this is completely self-evident – and it is. However, the majority of workers never really get this connection and the power it has for freeing them up from Forced Work. In some ways it’s an expanded appreciation for the virtues of frugality.
Try it – it’s quite amazing how circumstances shift when there is an increased focus on apparently petty expenses.