What is your greatest asset? Most people think it is their house. They are wrong. Bank account? Wrong again. For the vast majority of people, the greatest asset they have is the ability to generate income. Think about that for a moment… How does the mortgage for the house get paid? How does that bank account get filled? How do you repay debt, fund retirement and investment accounts, or pay for food, shelter, clothing and other life essentials? Unless you are independently wealthy, you work to create this income.
Yes, there are people have reached the crossover point with their investment portfolio (the point at which their investments consistently earn more than they do at their day job). But many people who reach that point still need to work to maintain their current standard of living because they may have debts or other obligations to pay. They may also outlive their money if they quit working too soon.
A little about net worth
Yesterday myself and several other bloggers discussed our net worth. Steve, the author of the blog Brip Blap, wrote an article explaining his thoughts on net worth. His take is that net worth is basically arbitrary. For the most part, I agree. Your net worth has a different meaning depending on where you live, your stage of life, how you determine your net worth, the type of assets that comprise your net worth (income generating assets, retirement funds, half a million acres of barren wasteland in the desert), etc. Knowing your net worth can be good if used as a checkpoint, or a motivational tool, but net worth cannot calculate your financial future, nor does it measure your great financial asset – the ability to generate income.
Your most valuable asset
When you consider net worth, it is also important to consider your earning potential, or the earning potential of your assets. Perhaps the best example is your job. Most people work 30-40 years before they retire, which is a little less than half the expected life span for most men in the US. When you stop to consider that almost half your life is spent working, you realize it pays exponential dividends to maximize your greatest asset.
Other income generating assets are extremely valuable to your total financial health. Some examples of income generating assets include rental properties, dividend paying equities, a side business, royalties, patents, annuities, pensions, and more. There are many ways to create alternative income streams and doing so can have an immediate and lasting effect on your financial health.
In fact, diversifying your income streams is much like diversifying your investment portfolio, and just as important. There are many financial factors that are out of your control. One cannot control the markets, inflation, gas prices, and other important financial matters. There is also the possibility of losing your job. Having a diversified income stream can help you weather some of these events.
Net worth is nice to know, if only to motivate you or keep you interested in having sound financial practices. But I believe the ability to create income is a more important indicator of your financial health.