Who is Your Wealthiest Neighbor?
Last week at dinner, my son, Hudson said something interesting that I had to address. He said “One of our neighbors has 4 cars. He must have a lot of money!”
Now there are a couple of things you should understand about me.
#1 – I love to teach. I teach the 6th graders every Sunday morning at church. I’ve taught seminars to CPA groups. I love to teach kids (and adults) how to waterski. I’ve trained new employees in their job skills. And I love to teach my kids life lessons.
#2 – I nerd out about finances. I mean really nerd out. If you go through my stack of books, my list of podcasts, my twitter feed, you will see 90% of it is about finances.
My family knows this about me, and as soon as I butted in to my son’s comment, they all rolled their eyes because they knew what was coming. Here’s a glimpse into our dinner conversation that night with some important lessons to learn.
I asked my kids this question: Let’s say our house is worth $500,000 and our neighbor’s house is worth $1 million. Who is wealthier?
It’s a bit of a trick question, but they fell for it. They said “the neighbor with the $1 million house.” Wrong!
So I had to ask another important question:. How do you define “wealthy?”
The best measure of wealth (at least worldly, materialistically speaking) is your Net Worth. Your Net Worth is your Assets minus your Liabilities. Or another way to say this, is to take the value of everything you own and subtract the value of everything you owe. The difference is your Net Worth.
So I added some more details to the scenario for the kids. What if we own a $500,000 house and do not have a mortgage. And our neighbor owns a $1 million house, but he borrowed $800,000 to buy it. Now who is wealthier?
It definitely looks like the neighbor with the million dollar house has more money. But, using the Net Worth formula, we have a $500,000 Net Worth and the neighbor has a $200,000 Net Worth. So even though our house is half the cost, we would have a higher net worth because we own the whole value.
See, Hudson fell right into how our society judges people’s wealth. Our culture determines others’ wealth only by what they spend. Because that’s what we can see. But that’s an unfair assessment because we have no idea what someone saves or owes. (We addressed more of this in this post: Keeping up with the Joneses.)
Having a lot of stuff and spending a lot of money does not make you wealthy at all! In fact, most people buy a lot more stuff than they can afford. They are carrying loads of debt to support all of their stuff. But you can’t see that on the surface. So they look wealthier.
It’s the same as the epidemic we are going through with social media. Everyone looks like they are living an amazing life, but you only see the shiny parts. You don’t see the struggle and you don’t know all of the experiences. And some people’s lives may be much more fulfilling than they show on a social platform. It’s an inaccurate measuring stick.
So don’t assume you know someone’s situation by just the surface level you can see.
The biggest point to remember is Net Worth has nothing to do with your overall wealth. I define material wealth as your Net Worth. But really that is not what makes you overall wealthy. I’m blessed to have my health, my family, and the grace of God. That is much more than I deserve. I don’t see money or assets as something I own. I just see myself as a steward of those resources for the short time that we are on this earth.
Do you know your Net Worth? Do you track it to see if you are making financial progress toward your goals? Do you have a healthy relationship with money? That’s exactly what I help people with! Reach out to me if I can help you on your financial journey.
