I was reading the book "Rich Dad Poor Dad" by Robert Kiyosaki a few years back and there were two concepts I really liked and want to share. They are ways to think about wealth and how to accumulate it. First, wealth should be measured in time. How many days could you go without working before you ran out of money? If you are like most people, you divide your monthly expenses (bills, food, gas, fun, etc.) into days (30), then divide your savings by your daily bills. For example, you might pay $300 a month in expenses or ($300/30 days) $10 a day on average. If you have $600 in savings, you can last ($600/$10) 60 days. Kiyosaki points out that most people have so little savings, because they're spending all of their income, that even missing one day of work can wreck havoc on people's lives. Where are you on this scale? For me, I have managed to spend less than 50% of my income. Thus, for every day I work I can effectively take a day off. I've been working for two months now and have enough wealth to last... 2 months. Just think, if I did this for a year, I could take a whole year off to pursue something. Again, where are you?
What is and what is NOT an asset?
The second concept is that Kiyosaki defines an asset as something that puts money into your pocket each month. A liability is something that takes money out of your pocket each month. So, let's test you on this definition. What is your car? A liability because you keep putting money into it for gas and maintenance. What about your TV? A liability because you contribute to electricity, cable and movies (not to mention your time, which is worth something). What about stocks? Actually it's neither because even though you get money when you sell it, you no longer own it, but it also isn't taking money out of your pocket. What about the house you live in? A LIABILITY. You repair the house and make interest payments. Yes, you're earning equity, but that doesn't regularly flow into your pocket. How about a simple savings account? An asset because each month the bank adds money to your account (if you use ING, it's actually a noticeable amount). Other assets include investment real estate, businesses (well, successful ones), book royalties and many more.
Bringing it together
So, you've accumulated some sort of wealth - maybe 60 days, maybe less, maybe more. Right now I have mine sitting in an ING account paying me interest, putting money in my pocket. What can be done to increase those days faster? What if I acquired enough assets, putting money into my pocket, that the days become infinite because I always have enough income from assets flowing in to cover my expenses each month (aka infinitely wealthy)? One way to do that would be to keep saving and live only off the interest. I did the math and assuming I spend/save the same I could be infinitely wealthy in 2 years (I actually give myself 5 years to do it since things happen in life). How long will it take you? More importantly, what can you and I invest in to earn higher returns so we can get there faster? Simply buying a house and living in it won't get us there and neither will only investing in mutual funds. Though those are important, think about ways to get cash flowing, monthly, into your pocket. With this, in combination of keeping your expenses as low as possible, you will be well on your way out of the Rat Race.