THE DECISION
- Dec 28, 2016
- 4 min read
Keywords
Assets - property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
Liabilities - a thing for which someone is responsible, especially a debt or financial obligation.
Net worth - This is total assets minus total liabilities. The information may be compiled from a number of sources, and typically includes the following:
Assets: Cash in the bank
Assets: Personal investments
Assets: Resale value of house
Assets: Resale value of automobiles
Assets: Resale value of furnishings and jewelry
Liabilities: Credit card debt
Liabilities: Mortgage debt
Liabilities: Car loan
Everyone seems to have this goal of becoming a millionaire one day, but people get the definition of that specific position confused. I've heard many people, in person and via the media, associate being a millionaire with having $1,000,000 in your bank/investment accounts. But what if you are also $825,000 in debt? Are you still a millionaire?
The true definition of becoming wealthy is associated with your net worth, not your financial possessions solely. According to one of my favorite sites, Investopedia,
"Net worth is the amount by which assets exceed liabilities. Net worth is a concept that can be applied to individuals and businesses as a key measurement of how much they are worth."
EXAMPLE
A couple has the following assets:
primary residence valued at $550,000
an investment portfolio with a value of $175,000
automobiles and other assets valued at $40,000.
Their liabilities are primarily:
an remaining mortgage balance of $100,000
a remaining car loan balance of $10,000.
The couple's net worth would therefore be assets minus liabilities:
([$550,000 + $175,000 + $40,000] - [$100,000 + $10,000]) = $655,000.
Money is more about behavior than math. If this was false we would all be debt free, however, this is sadly far from true. We are all climbing a mountain just like the next person. Although it takes true determination to get rid of your debt before you start saving heavily and investing, we've accepted the challenge. Becoming wealthy is a decision that requires INTENTIONAL effort and laser focus. And now we have, THE DECISION:
Baby Step 1 – $1,000 to start an Emergency Fund
Baby Step 2 – Pay off all debt using the Debt Snowball
Baby Step 3 – 3 to 6 months of expenses in savings to increase fund from "Baby Step 1".
Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Baby Step 5 – College funding for children
Baby Step 6 – Pay off home early
Baby Step 7 – Build wealth and give!
I wrote a detailed post discussing these steps in my last blog entry: ONE STEP AT A TIME
This is not the only way to become wealthy, it's just the route that my wife and I are taking. Listed below are a summary of the steps we follow:
DEBT: Debt elimination will be our primary focus first. EVERYTHING else will be put on hold TEMPORARILY until this is completed. Some people choose to pay off debt, build a savings account AND invest all at once. For others that may work, but we are choosing to focus on ANNIHILATING our debt quickly. Having a negative balance associated with our net worth makes my eye twitch a little (lol). To me, it's like being excited about a brand new luxury car purchase but realizing that the engine is useless. This part takes some serious discipline and as Dave Ramsey says "gazelle intensity".
EMERGENCY FUND: Our debt destruction will release the money to build an emergency savings account valued at 3-6 months of living expenses. This is in case you encounter true emergencies: lose your job, replace an engine/car, replace a roof, etc. Having no debt will complete this step within 8-12 months or sooner depending on how God wants to bless us financially at that time.
INVESTING: After the two steps above are completed that's where the investing starts in BIG DOLLARS. As mentioned previously, we use Dave Ramsey's principles as our foundation, so we'll do 15% of our own money towards retirement. This does not include any matches, pensions or any contributions from your company or the government. Depending on them can get you in trouble. This is a step that coincides with paying off your primary home as quick as possible. Having no debt and a sufficient savings account will result in large contributions to your investment accounts. With research, smart decisions and compounding interest, your investment accounts have great potential to grow at an awesome rate.
It takes longer to complete three tasks simultaneously rather than one of the goals at a time. Tackling one thing at a time will yield extraordinary results and it will take sacrifice. I started reading a book called "The One Thing: THE SURPRISINGLY SIMPLE TRUTH BEHIND EXTRAORDINARY RESULTS". Two really great quotes from the book are:
"Success is sequential, not simultaneous"
"If you chase two rabbits, you will not catch either one"
Don't let your debt confuse you or discourage you from kicking its butt!
ROMANS 13:8
Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law.
1 Timothy 3:5
For if someone does not know how to manage his own household, how will he care for God's church?
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