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Does Having Nice Things Make Someone Wealthy?

 

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by Rob Bertman, CFA, CFP® in Debt, Home buying, Money Strategy, Wealth building
July 6, 2016

Summary

Today I want to talk about a topic that a lot of people have misconceptions about.  What wealth is, and what wealth isn’t.

A lot of times we think people are wealthy when we look at what they have.  Maybe someone has a nice house or a nice car or a nice boat. Maybe they just took a great trip.  That person must be wealthy right?

But that is only part of the equation to wealth.

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Let’s say you see that someone has a house for sale for $500,000 on Zillow or Realtor.com. You might think, “Wow that person has a $500,000 house! They must have a lot of money.

But what’s behind the scenes is how much that person owes on their mortgage, home equity loan, and credit cards.  So even if they sell their house for $500,000, they may have a lot of debt to pay off.

Now let’s say this person has actually paid off their entire mortgage, and so when they sell that house for $500,000, they don’t have to pay off any debt. They immediately get $500,000 cash. Is that person wealthy? Well I would classify them as such.

So when we talk about wealth, wealth isn’t what someone owns. It’s not the house and the car. It’s what they own minus what they owe.

In the example of a house, the home value minus the mortgage is the actual wealth in the house or home equity. The greater the equity, the more wealth that is in the house. The smaller the equity, the less wealth is in the house.

Someone who is wealthy not only has a lot of stuff, but they don’t owe a lot of money on that stuff.

Now why is wealth important?

Let’s add up everything that someone owns, checking, savings, and retirement accounts, houses, cars, everything. What if they were to sell all of that then take the proceeds to pay off all their debt (mortgage, auto loan, any other debt). How much money do they have left over after selling everything that they own and paying back everything that they owe.  That number is someone’s wealth or net worth.

The reason that’s important is because wealth is what supports you when you don’t have money coming in. Because when you don’t have any money increasing our savings or paying off our debt, it’s what our wealth is and what it does that supports us in life.

So wealth isn’t just having a lot of stuff.  Wealth is owning a lot but not owing a lot, and this is important because wealth is there to support people when they no longer have money coming in.

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Transcript

Hi there, I’m Rob Bertman, founder of Money With Impact and this is 5 Minute Financial Fitness.  We get your money in shape in 5 minutes by giving you great tools, tactics, and strategies that will help you improve your financial situation. And we do it in a way that’s easy for you to understand, and we do it in 5 minutes.

Today I want to talk about a topic that a lot of people have misconceptions about.  What wealth is, and what wealth isn’t.

A lot of times we think people are wealthy or have a lot of money when we look at what they have.  Maybe someone has a nice house or a nice car or a nice boat. Maybe they just took a great trip.  That person must be wealthy right?  Look at all they have and all they’re doing.

But that is only part of the equation to wealth.

Let’s say you see that someone has a house for sale for $500,000. You look on Zillow or Realtor.com.  You’re just looking around, and you see that there’s a house for sale for $500,000.  Now you might think, “Wow that person! They have a $500,000 house for sale! That’s a pretty nice house. They must have a lot of money.

But what you don’t know, what’s behind the scenes is what if that person has between the mortgage, home equity loan and line of credit, and credit card debt and they actually owe $550,000! So even if they sell their house for $500,000, they get to pay off $500,000 of that debt, but they still owe $50,000. Would you think that person is wealthy even though they have a $500,000 house? Probably not.

Now let’s say that you see this house for sale for $500,000, but this person has actually paid off their entire mortgage, and so when they sell that house for $500,000, they don’t have to pay off any debt. They immediately get $500,000 cash. Is that person wealthy? Well I would classify them as such.

So when we talk about wealth, wealth isn’t what someone owns. It’s not the house and the car. It’s what they own minus what they owe.

So in the example of a house, if we take the house minus the mortgage, that is called net worth or home equity, and the greater the equity, the more wealth that is in the house. The smaller the equity, the less wealth is in the house.

So when we talk about being wealthy, we want to make sure that…someone who’s wealthy, they not only have a lot of stuff, but they don’t owe a lot of money on that stuff.

Now why is wealth important? Wealth is important because…the way to look at it is…let’s add up everything that someone owns, checking/savings account, retirement accounts, houses, cars, everything. What if they were to sell all of that?  Then take the proceeds to pay off all their debt (mortgage, auto loan, any other debt). How much money do they have left over?  After selling everything that they own and paying back everything that they owe.  That number is someone’s wealth or net worth.

The reason that’s important is because, right now, you may be working. You may have your own company, you may have a job and you have money coming in.  But when you decide to retire or stop working or maybe between jobs, wealth is what supports you. Because when you don’t have any money increasing our savings or paying off our debt, it’s what our wealth is and what it does that supports us in life.

So what wealth is again is owning a lot but not owing a lot, and what wealth isn’t is just having a lot of stuff.  This is important because wealth is there to support people when they no longer have money coming in.

So thanks for joining me this week. We’ll be covering another great topic next week. So be sure to watch for my podcast. You can go to iTunes or on your Android phone or go to Stitcher and subscribe to “5 Minute Financial Fitness” podcast and get it directly there.

If you like this video, if you like this audio then please go ahead and leave me a review. I greatly appreciate it!

Thanks for taking the time, and we’ll see you next week. Thanks!

Rob Bertman, CFA, CFP®
Founder & CEO
Money With Impact
rob@moneywithimpact.com

Sign up for the webinar on this topic including Q&A!

 

Cut your spending by $6,000 without giving up the fun and without a complicated budget.

Break the paycheck-to-paycheck cycle, find the money to pay back your loans and finally build your savings.