Anybody reading this play cribbage? I do, usually every Monday evening. Currently I am experiencing a spectacular losing streak. When I complain about this, my fellow players remind me that it is all in the cards one is dealt.
Segway: When assessing the building of wealth in relationship to your income and net worth it is all about what the numbers tell us. This post is inspired by a continued re-reading of THE MILLIONAIRE NEXT DOOR by Stanley and Danko.
In one of the case studies that they do in the book they compare 2 women who earn about the same amount of income but whose net worth varies dramatically as does where the bulk of their net worth resides. The first person has the bulk of their net worth in realized (taxable income) income. Therefore most of what she earns is taxed. The second person has a large part of her financial assets in investments that do not realize an income. Therefore much of what she earns is not taxable.
Question: What percentage of your net worth is made up of realized income?
The greater this percentage the greater the percentage of your net worth that is taxable i.e. the greater the drag on the accumulation of your net worth.
- Based on this information one should attempt to have a high percentage of financial assets that generate wealth but not realized income.
- It is a good thing to become a master at minimizing realized income.
- The more you earn the less it matters how much more you make and more what you do with what you already have.