Myth of Your Personal Net Worth

Do you know how much do you worth? Your net worth is the same as a company's balance sheet. It is as simple as the difference between Total Asset you own and Total Liability you owe. A positive figure means you own more than what you owe or vice versa.

Now, the tricky part is: Do you analyze what you own? Assets consist of Liquid Assets (such as cash, bank accounts, checking accounts, stock investment and others that are easily be converted into cash) and Non-liquid Assets (such as Real Estates, Businesses as well as others that are unable to be converted easily into cash). You may be worth multi-million as you are holding relatively large portion on Non-liquid Assets at current market value. Provided these Non-liquid Assets are generating cash flow or else you might face difficulties if you need huge amount of cash in short period of time.

It is indeed true that a person's net worth could be inflated very fast should the person is holding a few good Non-liquid Assets such as houses, shop lots, condos or apartment due to revaluation of these properties according to current market price against purchase price. Provided there are willing buyers on these properties, the figures are only on paper. The person can't liquidate them easily as time is required to look for buyers as well as carry out buy & sell proceedings.  Therefore, say a multi-millionaire with substantial Non-liquid Assets and limited Liquid Assets, he/she might still have tough time to meet living requirement for long term without active income.  Therefore, creation of passive income is crucial here should you want to get out from the rat race.

The passive income from Liquid & Non-Liquid Assets could be as follow:

 

	Liquid	Non-Liquid
Passive Income	Dividend (net after all taxes)	Positive Rental Income (net after all expenses)

That is not all. Another thing you need to do is to divide what you have received against your capital invested in order to get the yield. You have to compare this yield against risk-free investment vehicle such as fixed deposit rate. Due to higher investment risk involves, this yield should be higher than fixed deposit rate. Take an example, say fixed deposit rate is 4% p.a., the yield should be at least 5% p.a. or higher in order to offset the risk you face.

Say everything is going well, next you have to evaluate whether your passive income is sufficient to support your lifestyle requirement. If not, you could only work harder to save more money to work for you or lower down your lifestyle. The decision is yours.

Now, do you get the picture? A high income earner or high net worth individual is not necessary to have sufficient passive income for comfortable retirement. The key is how much cash flow could his/her assets generate for him/her.