Your wealth score shows how long you can survive if you stop working.

I once met a Deputy Managing Director of a bank, and he was worried.

“How’d I be able to manage my expenses after I retire?”

He had a retirement fund, and his company would give him large sums from provident funds and gratuity.

But he was uncomfortable with the idea of living off of savings.

It’s a valid concern. How do you know if your retirement fund is enough? What about emergencies and luxuries?

There’s a way to handle that —

What’s your wealth score?

The idea of a wealth score has been inspired by the book Rich Dad, Poor Dad. The author was inspired by American architect Dr. Buckminster Fuller — who asked a simple question:

How long can you survive if you stop working today?

Robert Kiyosaki, one of the authors of the book, had a different way of defining assets (and it makes sense).

He said investment can only be called an asset if it generates income for you.

• Your stocks, growing at ~8% per year, are assets
• Your savings, generating 5% annual interest, are also assets
• Your car, costing you money to maintain, is not an asset

Just because you own something doesn’t make that your asset.

The wealth score shows how many days you can survive from your income-generating assets — not your savings or your monthly salary.

The formula for wealth score

How about an example?

• Let’s assume you have 100,000 in assets that generate income at 1% per month. Your EFA or Earning From Assets= $1000/month
• You have intellectual property, a book, that nets you $1000/month in sales on average
• Your monthly expense is $4500/month
• You have leased a car, and that costs you $500/month. Your monthly Liabilities = $500/month

Combining all of these, your wealth Score = $2000 / ($4500 + $500) = 0.40

A score of 0.4 means you can cover 40% of your monthly expenses with your earnings from assets.

Or you can say that you can survive for 12 days/month (40% of the month) if you stop working today

What can you do with the score?

1. Firstly, don’t leave your job if you don’t have an increasing score. You can consider your side hustle as income from your intellectual assets. And if they keep on increasing, it’s safer to leave your job then.
2. Secondly, it’s better if you have a score of 1 before you take that leap. A score of 1 means you can survive on your EFA.
3. Also, consider lowering your debt if you want to boost your wealth score. Debt reduction improves wealth score very quickly. Be careful about acquiring new liabilities as well.
4. It should be obvious that you need to manage your expenses efficiently.
5. Most importantly, you must search for assets with higher returns. From there, try to fund portions of your expenses with the EFA. For example, maybe you can cover your transportation costs in the first month. In the sixth month, you might be able to tackle your grocery expenses too.

Let’s take an example

Mr. David Tennant, spends $3,000 on rent, $1,000 on groceries, $1,000 on transportation, $500 on medical, $2,000 on his family, $1,000 on living expenses and another $1,000 on other expenses.

In total, his expenses are $9,500. On top of that, he has a monthly car loan payment of $1,500.

He has two rental properties that pay him $2,000 in total per month. And he earns $5,000 from intellectual properties.

Using this $ 7,000 EFA, he pays off his rent, buys groceries, pays for transportation, and spends on his family.

He pays for the rest from his pocket. But he spends a portion of his monthly earnings to build his asset column.

Final Thoughts on Wealth Score

Financial freedom is not only for those looking to leave their jobs.

It’s for everyone.

Sooner or later, you will have to leave your job (when you retire). Your wealth score will ensure you won’t have to dip into your savings to manage your expenses.

It means that you can maintain the same standard of living, even when you stop working.

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This article was first published on Making of a Millionaire.