The Real Number That Predicts Your Wealth (It's Not Your Net Worth)

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience. Live it is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Here's a number that should stop you cold. US Household net worth is at an all time high, yet financial stress is still everywhere. That contradiction is exactly what this episode is about. The real number that predicts your wealth. And it's not net worth. Bottom line is this. You're going to know why net worth is an incomplete metric. What number actually predicts your financial freedom, which is what we really want. And how to start measuring wealth in a way that reflects how your life really works. Okay. Net worth tells you what you've accumulated. It doesn't tell you whether your money can fund your lifestyle or absorb a shock or a downturn, or whether it's going to give you options. This is building your money machine, where we help you master your money, eliminate financial stress and and live a life by choice. Because earning more doesn't make you free. A money machine does. And I'm your host, mel Abraham, a CPA, an entrepreneur, a money mentor for 30 plus years, and someone who's actually walked the path to financial freedom himself. And I've watched people with massive net worth still live paycheck to paycheck emotionally, and those with far less live completely free. And that's what I want for you. So let's do this. All right, let's jump in. Because after decades of doing this, I've seen something that surprises people. You know, I've worked with individuals who have seven figure 8 figure net worths who actually still feel trapped, they feel stressed, and they feel like they're one bad month away from panic. And then I've worked with people with far less net worths who feel calm, they feel confident, they're in control of their life, the same money system, wildly different outcomes. And if you've ever said to yourself, I just want to know how much is enough, well, congratulations, you're already asking the right question. Because most people are chasing more instead of enough without knowing what more is supposed to do for them. And that's truly not ambition. That's exhaustion with better branding. So I'm gonna break some things down for you in different sections and we'll see how net worth should be used, what number really drives it, and how to find the freedom amongst it. Okay, so let's ask the first question. Why is net worth incomplete? Because I don't want you to think that net worth is wrong. It's not. It's just incomplete. Net worth isn't a bad number. It's just wildly misunderstood. When you think about net worth, it is simply assets minus liabilities. Okay? It's a snapshot. It's a photo that you happen to take in a moment in time. And it tells you what you've accumulated and it tells you who you owe and how much you owe. So what it doesn't tell you though, is how usable that wealth is, how resilient your finances are, or whether your money can actually support your lifestyle. And that gap creates a dangerous illusion. Okay? According to the Federal Reserve Flow of Funds, a report, total U.S. household net worth recently crossed roughly $176 trillion. That's an all time high. Now on paper, Americans have never been wealthier. Yet the data from the Federal Reserve, when you start to look at some of the other reports and bank rate and everything, they consistently show that a large portion of households would struggle just to cover a modest emergency expense, a thousand dollars or even less. This disconnect, it exists because much of the net worth that we're measuring is illiquid. It's restricted or it's not producing cash flow that supports life. Okay? This is where net worth quietly lies to everyone, virtually by omission. If you will see, the large percentage of most households net worth sit in home equity, in retirement accounts or in business values. All of them, don't get me wrong, they're real assets. They're all valuable. But not all of them are equally usable. See, housing equity alone, typically when you look at the data represents 30 to 40% of the median household's net worth. Okay, 30 to 40%. Now that's meaningful. But you can't turn around and swipe your granite countertops at the grocery store. You can't do that. You can't venmo your roof when life throws you a curveball. So yes, it's an asset, yes, it's part of net worth. But no, it doesn't support your lifestyle. It is a lifestyle. Assets. It's a use asset. Now I get it. I can hear you now. You say, yeah, but you can sell or borrow against the home, but that comes with transaction costs. It comes with friction. It comes with debt. It comes with timing, risk. It comes with costs. It can stress people out. And you sit back and say, well, that is an easy solution, and it is a solution. But this is how people become what I call asset rich and cash poor. They look wealthy, but their life is still being funded almost entirely by their effort. By their effort. So if you've ever felt financially successful and yet you're still stressed, stay with me here because the next distinction is where the light bulb usually goes on. Okay, so the first upgrade in the net worth measurement is something that I call investable net worth. See, instead of throwing net worth away, how about we refine it? And I do this in the money machine blueprint. I do it in my, in my book building your money machine and all the things I do. And it's this idea of investable net worth. The investable net worth is the portion of your assets that can realistically be used to generate income that have some liquidity or give you flexibility without blowing up your financial life. Okay, that means that we start discounting or excluding things like the primary home, your residence equity that you can't easily access. Now, I get it. It's. I'm not saying it's not an asset. I'm just saying it's not a. It's not an asset that is cash flowing to pay your bills. It's a use asset that is a lifestyle asset that we have. I live in an expensive home right on the beach. Is it an asset? Yes. Does it support my lifestyle? Yes. From the perspective of me living in it. But does it create cash flow that allows me to pay my bills and allows me freedom? Not necessarily. Okay, the other things that we would exclude would be illiquid private business value. So many people that are listening to this, you might have your own business, and there is value in many people's businesses like there are in my business. But I can't convert that value to cash easily. You know, it's generating cash from operating, but it's not easy to sell. And some businesses, frankly, are just not sellable. In fact, it said that 80% of businesses that are listed for sale never actually close. They never transact. So if you're dependent upon your business value as your sole ability to create wealth, that is a precarious place. So I typically will discount that or put it as a secondary asset in the calculation. Then there's our retirement accounts. Now, retirement accounts are the accounts that we're building our net worth on the Investable net worth. You've got index funds, you've got ETFs, you might have self directed retirement kids. Those are beautiful accounts. Now what we need to understand about them is that if I try to access the accounts, unless it's a Roth type of account, there is at least taxes involved with it. So there is tax friction, if you will. If I try to access the accounts before I am of age, if you will, retirement age, then not only are there taxes, there are penalties. And all of that is an erosion of the machine meant to support you. Now it doesn't mean you don't have them. You have assets. That's why asset location is just as important as asset allocation and diversification. But just know that those go into the calculation and everything when we start to do that. Now, when you look at the research, 55 to 60% of the total US household wealth is actually investable assets. Okay? The rest is tied up in illiquid or potentially restricted assets. That means that nearly half of, of what people think they have isn't truly available to support the life that they want. Now here's the uncomfortable truth though. Just because you own it doesn't mean it serves you. If an asset looks great on a spreadsheet, but doesn't show up in your life, it's a spectator, not a teammate. All right, this is also where one of my essential evaluation ratios come in. In fact, we have an essential evaluation scorecard that we work with our clients on. Was this one page evaluation. And one of the, one of the ratios that we talk about is this ratio of retirement progress ratio. And the simple version is this. It's taking the investable net worth divided by your freedom number. Okay, we just define what your freedom number is. What is, what is that number that's going to support the lifestyle that you want? And then we compare it to the investment net worth to see am I there or not. This ratio doesn't judge you. It just gives, gives you a direction and it tells you how close you are in your investable assets to funding a lifestyle that you want. And this is something that many people don't calculate. This is where many people, when they do, they realize, oh, they're not behind or maybe I'm measuring the wrong thing, or maybe I am behind. And it's, and that's the, the measuring stick. That one of the measuring sticks that we would, we would look at. Now you may look at it and go, well, wait a second, I don't even know what my freedom number is. So I got you all right? I got you real quick. If you're sitting back trying to figure it out, I got something called the Freedom number calculator. It is totally free. I will hook it up down below. Go to melabraham.com forward/number. This is going to help you estimate how much of a machine you need to build to support the lifestyle you want. Now, this is a ballpark. It's just a general kind of, kind of calculation. When you really start to dial this in, you need to put a bespoke, detailed financial plan in place to make it happen. But this will put you on the right horizon. Go in the right direction. So go ahead and grab that. Do it. So now you know your number and now we start building the investable network. So here's the other thing is I think that the other real number to look at is what I call the cash flow flow coverage. This is where everything shifts. See, the real number that predicts your wealth and how much of your lifestyle your assets can pay for without your labor is something I call the cash flow coverage calculation. Okay? This is taking the monthly cash flow from the investable assets divided by the monthly lifestyle cost. See, once you know how much your lifestyle costs and you know how much your assets are generating, you can then look at and say, AM I covering 100%, 110%, or 20%? See, if the number, if this calculation is one, then your assets are fully funding your lifestyle. If it's 0.5, then your assets can only cover half of it. If it's 0.1, then you're still really dependent on your effort. Okay, so let's make this painfully simple. If your assets cover 20% of your lifestyle, then 80% of your life still depends on you showing up every single day. Day. Now, it's not bad. It's just honest. And so what we need to look at is how do we move that forward and get that closer to one or above one, okay? Because cash flow changes your life. Two people can have the exact same net worth on paper. One has a machine that's generating cash flow, the other has a museum, and there's no cash flow. So if you want freedom, stop asking, how much am I worth? Start asking how much of my life is already paid for. That leads me to, to the next piece, and that is how hard are your assets actually working? This is going to go one layer deeper, okay? Because not all assets work equally as hard. Some assets grow nicely over time, but do very little for your life today. Others require a huge amount of capital just to produce a modest amount of cash flow. Some look impressive, but barely move the needle emotionally or practically. Now that's where I start to look at another essential valuation metric, which I call the cash flow to asset ratios. Very simply, how much annual cash flow do my assets produce relative to their value? In fact, this is something that is a real calculation that I'm dealing with. Right now I've got a rental property and be upfront about is that it's probably worth $750,000. But the rents that I can get from that property don't give me the kind of return that I could get if I reinvested $750,000. So I'm looking at this saying, look, if the rents from the property, net rents after mortgage and insurance and, and all that type of stuff, if the net rents are only, you know, $25,000, that's a measly return on $700,000 when I know that if I invested it properly, $700,000 could get me 10% or more. I could get $70,000 a year. This is the argument, this is the, this is the, the analysis that we're doing in this, in this piece. It doesn't mean that you chase yield blindly. It means, means that you understand what job each asset is doing. And if you don't know which assets are funding your lifestyle versus which ones are just decorative, you're flying blind. And most people are, most people won't take the time because they bought this, this property like I bought this property decades ago. Well, it made sense then, it may not make sense today. All right, because here's the thing. Your effort versus your earnings is the, what I call the oh, damn calculation. This is where we get, get the wake up call because the more we can fund our lifestyle, the less dependent on our efforts we are. But sometimes we don't realize that. See, my, my realization came when Jeremy drew that picture of me in front of two computer screens at six years old. And I realized that until I was able to separate my efforts from an, from the earnings that was generated by the efforts. In other words, until I could earn without the efforts being one to one relationship, I would always be imprisoned by the earnings machine. Now there's a tangible calculation to. Look at this. Take your monthly income and divide it into two buckets. Income that requires your ongoing effort. Like if I'm going and traveling to get on a stage to speak, that requires my effort. That income requires me. Then there's income that continues without my effort. That's the Second bucket, that's my investment income, it's my royalty income, it's my portfolio income, it's my other courses and that kind of thing. And ask yourself, if I stopped working for 30 days, how much of my income actually survives? And then extend it out and say, if I stopped working for 90 days, how much of my income would survive? What would break? Because if 90% of your income disappears the moment you stop working, then your wealth is still effort based, your life is rented, and your wealth and life aren't asset based. Now, there's nothing wrong with effort. I am efforting every day, but I'm doing it by choice. That's the difference, okay? This is why high earners often feel trapped. See, their lifestyle requires their constant, their constant effort, their constant output. Miss a week, stress rises. Miss a month, panic sets in. And if your income disappears faster than your motivation on leg day, then you don't have leveraged income. You have delayed exhaustion. And so that's the thing that we need to think about. Because if your money takes vacations, when you do, then you don't have a money machine. We need the money to be working for us 24 hours a day, seven days a week, 365 days a year. All right? And you got to look at it through a set of three buckets. As we start to move down this kind of deeper into this net worth conversation, money actually needs structure, okay? And I organize money in three buckets, each with a different timeframe and each with a different job. Because too often we just put it in a bucket and say, it's my retirement. No, because we live in different time frames. So I have a short term bucket, I have a midterm bucket, and I have a long term bucket. That short term bucket covers roughly, you know, up to 24 months, maybe 36 months of, of living. Now this is my stable money, this is my liquidity, this is my peace of mind. This is the bottom element of the wealth priority ladder that I, that I teach and I talk about and I wrote about in my book. This is what gives you liquidity. This is cash in money markets, high yield savings accounts. The idea here with this bucket isn't maximizing the returns. It's controlled. It's peace of mind. It's allowing you to sit back and say, I'm good. If life happens, that's where a lot of people don't have that short term bucket, then the midterm bucket. This is going to be, you know, two to three years on, up to seven or eight years. This is the flexibility money. This is the stuff that gives you opportunity. And this stuff I'm putting in brokerage accounts and investment accounts and income producing assets and everything that are able to generate cash flow and growth over time. But also I keep some of it in types of assets that I can redeploy without destroying the long term plan. So this is my opportunity bucket to look for other opportunities and start to reinvest and do that. Then there's long term bucket. This is seven, eight years and beyond. This is freedom. This is the legacy money. These are the retirement accounts, the scalable income streams. This is the long range investments. Okay? And when I look at this, I interact with these buckets very differently. And now hopefully you're starting to see that it's more than just net worth that drives your wealth and your freedom. Okay. And I'm going to give you some action steps in a moment. But short term is when I have short term bucket, that stability gives me emotional control. Because we know if emotions get involved in our financial decisions, our financial intellect goes down midterm. That's flexibility. Flexibility gives me strategic options. Long term, those are our assets having true assets that are generating cash flow. That gives me freedom. Okay? You skip the short term bucket and everything feels scary. You skip the midterm bucket and everything feels rigid. If you skip the long term bucket and well, good luck. All right, so here's what I want you to do, is that, that I want you to calculate your net worth just to see the landscape that you're in. So the first step, calculate your net worth. Then I want you to identify in the second step, identify what's truly investable today. No judgment. Okay. Are these lifestyle assets, are these use assets or are these potentially cash flowing assets? Okay, then number three is, is to calculate your real lifestyle cost. Not just the bills, but the life. You want to estimate it. We may not know what it will truly cost, but get an estimate. Most people never even look at it and everything. So get an estimate of what you think your lifestyle cost will be. Then the next step, number four is to calculate how much monthly cash flow your assets produce without you working. Okay? And now you get a chance to compare those two numbers to get clear on where you are on the journey. Not for judgment, but for direction. Okay, listen, let's bring this home. Because wealth is not about accumulation, it's about support. Net worth tells you what you've built, investable net worth tells you what might be usable. Cash flow though, tells you what actually supports your life. And the real number that predicts your wealth is not how much you own, but how much of your life your assets can consistently support without burning you out. All right, So I hope that this helps. I hope that you'll take this and go through the action steps and start to rethink how you build net worth. The assets you have in your life, the things that you're investing, and follow a plan that puts you in the three buckets to give you the freedom you desire and deserve. All right, let me I hope that this was valuable. I hope that you have taken away some things I would love to hear from you. Your new thoughts on net worth. DM me. Send me a comment. Post it below. All right? And if you have a question, let me know. At the same time, I love hearing from you and I love having the conversations with my audience. All right? So keep on rocking. And if you haven't done so already, make sure you subscribe. And while you're at it, give me a thumbs up. YouTube likes it and it makes my heart feel good. All right? All right. Until I get a chance to see you on your path to financial freedom, as I always say, always, always strive to live a life that outlives you. See you in the next one. Thank you for listening to the Affluent Entrepreneurship with me, your host, Mel Abrahamic. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there. And that's it for this episode of Building youg Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.