Many people (maybe even you!) are actually considerably wealthier than they think. Yes, they might drive an old car and, yes, they might not have been on holiday for a couple of years. But their personal finances are likely in pretty good shape, particularly when you consider all their assets.
Why People Seem Poor (And Why They’re Not)
The reason many people seem poor is that they separate their cash flow from their wealth. They might have a house and stock portfolio, but they don’t consider any of that part of their purchasing power. Instead, all they focus on is the money coming in every month. And because that’s quite limited, they automatically feel like they have less.
Of course, if you really think about it, most people have a tremendous stash of money. Consider the average American with a house and 401(k). Many people have more than $200,000 of equity in their properties, and a further $100,000 in stock, bonds, and crypto. If you add in all their physical assets, their net worth is easily $350,000, possibly more. That’s enough to generate a $25,000-a-year passive income, not quite enough to live on, but enough to stop worrying so much about the bills.
Of course, most people don’t appreciate this kind of approach to wealth analysis. If you own a house, you’re thinking about the maintenance and mortgage payments. You’re not thinking about your balance sheet: the amount of equity that you have in the home.
The Value Of Calculating Your Net Worth
But, in reality, that is precisely where you should be directing your attention. As assets such as real estate rise in value and you pay off your mortgage, you increase your net worth. This, in turn, leads to greater and greater wealth generation in the long term. Eventually, you can escape the need to pay interest at all, living month to month without any obligatory housing costs at all.
The Liquidity Of Modern Capital Markets
Of course, the story doesn’t end there. Thanks to equity release products, people have much more liquid wealth than they imagine. For instance, most people believe that if they want to release the money stored in their homes, they have to sell them and live off the proceeds.
But that’s not how things work in reality. Today, there are plenty of products that let you sell a part of your home back to the lender and receive cash in return. You then simply extend your mortgage or give the equity release firm permission to sell your home at a date in the future.
Stocks and bonds are also highly liquid, and transaction fees are considerably lower than they were in the past. Apps let you sell in seconds, and most brokers will only ask you to wait a couple of days before releasing funds to you.
Overall, this paints an interesting picture. While some people are genuinely struggling to make ends meet, others may be investing (often without realising it) in assets that are going to make them wealthier in the future.
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