In my previous blog, I have mentioned how the book “Rich Dad Poor Dad” provided me my first ever financial education. One of the first things that I learned from this incredible book is how to look at or measure your wealth. I used to think that my wealth is measured by how much money I make. But that’s wrong.
I remembered the days when I was a poor graduate student. I had a scholarship that provided me both with tuition and living expenses. It’s by no means adequate by my standard today. Yet I lived comfortably without having to work any other jobs throughout the whole 5 years of graduate study. At the time I thought if I can live comfortably with that tiny amount of money, I would be the richest man after I graduate and start working and make a salary which would be several times more than the scholarship.
But after I did graduate and get my first job, I didn’t feel I became any richer. See, my salary did increase, but so did my needs. I need a house. I have kids. I need nicer cars. I go on vacations. The list goes on. All these are generating expenses faster than I can make money.
Therefore if you only look at how much money one person makes, it’s not going to tell the whole story of how wealthy he is. You have to also look at how much money he spends. And one can only build wealth if he makes more money than he spends.
And this was the problem with me, before I have read this book. I only looked at one side of the equation and kept wondering why I don’t become wealthy even after I started earning salaries that are several times of my scholarship. I have a feeling that I am not the only one that didn’t realize this.
Let’s look at this another way. If you have ever applied for a mortgage loan to purchase a house, your lending bank must have asked you to fill out a “Personal Financial Statement” or PFS as part of the application. The purpose of this form is for the bank to know if you would qualify for the loan. How do they figure it out? One way is by checking your credit score to know your past history of credit. Your credit score tells them if you are “credible”. But wait, that’s far from enough. The other more important way, is to find out if you could afford the loan by studying the info you enter in the PFS.
If you have never filled out a PFS, I highly encourage you to download a sample and study it. Reading someone’s PFS is so much fun because it tells the financial resume of the person with those seemly boring numbers. I’d like to call PFS a financial portrait. A PFS will help you understand your personal finance quickly. Today I will not spend too much time on PFS but I will definitely use another blog to talk about it.
A PFS will usually have two parts. The first part is about your income and expenses. For the bank to know how wealthy you are, the first thing they check is not only how much money are coming into your pocket, but also how much is going out. Your income minus your expenses is what gives them the idea whether you can afford the loan or not. You may make a lot of money, but if you have a lot of expenses, you still may not be approved for the loan. The second part of the PFS is usually called the “balance sheet”, which is the topic of the next blogs.
So it helps me tremendously to finally understand wealth is not measured by how much money you make.
It’s how much money you keep!