Liquidity - Net Worth - Net Income

[UNEEK]

From what I have read from  some folks sharing - not everyone will be millionaires after the RV - some folks  have shared they will continue to work - maybe for themselves  but nonetheless, will continue to  work - the article here may offer some knowledge that will help down the road to manage what they  have in such a way  that  it will provide an easier life for them than they have now - UNEEK

 

Liquidity, Net Worth, and Net Income Are the Holy Trinity of Getting Rich 

By Joshua Kennon

 

The Three Things You Need to Focus On If You Want More Money

"Liquidity, Net Worth, and Net Income"

 

Do you want to get rich? The answer lies in growing your liquidity, net worth, and net income.

 

If you want to know how to get rich, the secret comes down to three things:

    Liquidity

    Net Worth

    Income (Profitability)

 

Your job is to maximize the three in a way that is consistent with living the life you desire, while doing whatever it is you love to do.  Your goal is not to die with the highest net worth possible. 

 

If you want to be financially independent, you should strive to increase the percentage of your household's earnings that originates as passive income each year so your family doesn't have to rely on your labor to put food on the table, clothes on their backs, and a warm fire in the fireplace.

 

 A family earning $500,000 from the income of a heart surgeon breadwinner is in a much riskier place than a family earning $500,000 in investment income from a portfolio of rental properties, bonds, and blue chip stocks, which will continue chugging out dividends, interest, and rents even if the breadwinner dies or is incapacitated.

 

To better understand each of the holy trio of wealth building, let's examine them individually.

 

Liquidity: The Liquid Resources You Keep on Hand for Opportunity or to Pay Bills

 

Liquidity refers to how quickly you can convert your money into cash that can be spent or invested.  In the past, we've examined the importance of liquidity and liquid assets so you already know this is a vital part of a good financial plan. 

 

It is possible to make a lot of money, enjoy tremendous success, and still find yourself in bankruptcy court because you didn't manage your liquidity needs well.  Nearly all bankruptcy filings are ultimately the result of liquidity shortfalls; a bill or debt comes due and the money isn't in the bank.  Default is triggered, setting in motion a chain of events that can be very expensive and financially devestating.

 

This is the reason many financial advisors insist on having enough cash on hand or in the bank to cover six months worth of expenses so you or your business could survive without any income. 

 

Some famous business leaders took this policy to the extreme.  Currently, Warren Buffett at Berkshire Hathaway is hanging onto more than $40 billion.  In the early years, Bill Gates of Microsoft kept the company completely debt-free and had enough cash to cover all of his expenses and payroll for a minimum of one year, even if they didn't sell a single item, giving him twelve months to adapt or shut down without wiping out his family's personal resources.

 

Cash is king, and you should always have a decent amount of it available to protect yourself in the event of unpleasant surprises or in case opportunities come up that you didn't expect.  Investors who had cash and other forms of liquidity on hand during the Great Recession were able to get fantastic deals on stocks and bonds that were available at fire sale prices.

 

Net Worth: Assets Minus Liabilities

 

Your net worth is what you would have left if you sold everything you own and paid off all of your debts.  If you are successful, over time, your net worth should climb ever-higher. 

 

It won't be a steady, gentle, upward slope, especially if you are a long-term investor in the stock market, but that is the nature of life; I call it the Cinderella Principle.  It is best to judge your progress in five-year rolling periods.

 

You should also focus on the quality and diversification of your net worth.  Two investors, both of whom are worth $2,000,000, might look the same on paper but if one owns a very successful, debt-free private company that has strong competitive advantages and the other has a portfolio of run-down rental houses in a bad part of town that is depreciating rapidly and falling into a spiral of unemployment and crime, the second guy has a much lower quality net worth because it is built on a less stable foundation. 

 

Profitability: Your Bottom-Line After-Tax Net Income

 

A profit is when you bring more money in than you pay out, leaving a surplus.  Profit is how you grow your net worth.  Profit can be used to pay down debt, build liquidity, fund investments, or give to charity.  You can measure your profitability in two ways:

 

    Profit Margins: There is the gross profit margin, operating profit margin, and net profit margin.

    Return on Capital: There is Return on Assets and Return on Equity

 

However you choose to measure your profitability, make it higher as time passes.  You should be generating a bigger profit at 30 than you were at 20; at 50 than you were at 40.  

 

Getting Rich Really Is As Simple As Focusing on the 3-Item Checklist

 

It may seem too easy, but those of you who are smart enough, disciplined enough, and have a bit of luck along the way, can vastly improve the circumstances of your life by arranging your family's balance sheet to focus on liquidity, net worth, and net income.  When you do this, you avoid many of the common traps that ensnare the average American, such as credit card debt or student loan debt.

 

http://beginnersinvest.about.com/od/Saving-Money/a/Liquidity-Net-Worth-And-Net-Income-Are-The-Holy-Grail-Of-Getting-Rich.htm