Successful Real Estate Investor Rob Rowsell explains money literacy terms in common language that investing beginners can understand. Master these financial concepts and terms as a step one in your wealth journey! No money making glossary is complete without this terminology to guide the way.
Money Literacy Terms – Net Worth and Income
Rob starts strong out of the gate with one of the foundational money literacy terms. When you subtract everything you owe from everything you own, you arrive at your Net Worth. In other words, your assets minus your liabilities equal your Net Worth.
Next, Rob explains the three different categories of income. Active Income means money that you are actively earning. If you work at a W-2 job or earn 1099 income, then all of that money qualifies as Active Income. Passive Income is money that you accrue without working a regular job. Some examples include Capital Gains from the sale of assets and the appreciation of the assets you own. Finally, Passive Residual Income (aka Horizontal Income) includes stock dividends, rent collected from tenants, royalties, and more. You may have taken one step to set up this “mailbox money”, and you enjoy earnings it brings you regularly without additional effort.
Important Financial Formulas
To truly succeed at the wealth game, you need to know your Vitality Factor. This is your true cost of living before you pay taxes and donate to charity. The Vitality Factor formula consists of adding your personal expenses to your deductible business expenses. This number is a key factor in planning for retirement.
Your Horizontal Income Score is the best measure of your ability over time to convert your Net Worth to Horizontal Income (Passive Residual Income). When you divide your Horizontal Income by your Net Worth, you get the Horizontal Income Score. For example, if your Horizontal Income is $100,000 annually, and your Net Worth is $1 Million, your score is 10. Rob estimates that the average number is around 3.5.
Most people subscribe to the Nest Egg Theory of investing. Summed up, the theory says that “Freedom is a number”. Typically, it’s the number of dollars in the bag of money saved in a 401k retirement savings account. The flaw in the theory? It is likely we will outlive the bag of money! Then, we may have to go back to work in order to pay our bills and maintain our lifestyle. If you truly want to keep working, great. If you have to work in order to survive in your golden years, not so great.
Finally, the Financial Freedom Formula is the most important of all formulas we’ll discuss on this list of money literacy terms. When you divide your Horizontal Income by your Vitality Factor, you get this number. If you arrive at 1.3 or greater (including taxes), then congratulations – you are financially free!
Tax Terminology
Your Blended Tax Rate means the average rate at which you are taxed on all of your income sources. Tax Drag means the wealth draining resistance taxes make on your investments and earnings. Cut this number as much as you can legally in order to avoid losing out on future compound earnings!
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