How do you measure wealth, in strictly financial terms?

Some people measure wealth by the amount of money that they make, in terms of salary, revenue of a business, etc. This basically amounts to a cash inflow measure of wealth: the more you make, the higher your wealth. More, people, however, take the approach of measuring wealth by how much money they have saved. Typically, one takes assets and subtracts liabilities, with the result being net worth.

Let us take two people, A and B, with these respective financial situations:

Person A:

Monthly Salary: $5,000

Assets: $350,000

Liabilities: $150,000

Person B:

Monthly Salary: $6,000

Assets: $350,000

Liabilities: $125,000

According to salary, Person B makes more and would be considered wealthier. According to net worth, Person B’s total of $225,000 (assets minus liabilities) exceeds Person A’s total of $200,000. Thus, using either measure, Person B comes out ahead as the wealthier individual.

I propose taking another look at wealth, and looking at it in terms of **months of covered expenses**.

By *covered expenses*, I’m talking about expenses for which you have the savings available to be used, if necessary. For example, if you have $4,000 of household expenses per month, and have $4,000 saved, then you have one month of covered expenses. If you have $4,000 of household expenses per month, and have $100,000 saved, then you have 25 months of covered expenses.

Taking this concept and applying it to Person A and Person B, let’s now include the additional information on monthly expenses to the data provided above:

Person A:

Monthly Salary: $5,000

Assets: $350,000

Liabilities: $150,000

Monthly Expenses: $3,000

Person B:

Monthly Salary: $6,000

Assets: $350,000

Liabilities: $125,000

Monthly Expenses: $4,000

As you can see, I kept the salaries, assets, and liabilities the same; only monthly expenses have been added. One might be tempted to first look at monthly net cash flow, to see how that looks; both parties have equal net cash flow.

But when you look at months of covered expenses, the picture looks different:

Person A:

Net Worth: $200,000

Monthly Expenses: $3,000

**Months of Covered Expenses: 66.7**

Person B:

Net Worth: $225,000

Monthly Expenses: $4,000

**Months of Covered Expenses: 56.25**

Thus, despite Person B having a higher net worth and higher salary (as shown before), it is Person A that can survive the longest on his savings.

That’s the point – given our sustainable level of expenses, **how long could we survive if our income stream completely dried up**?

One could always take this further, and add in any number of caveats, such as unemployment income, interest income on savings, etc. Additionally, I do find validity in the other measures, as keeping ones earning power healthy is important, and net savings is a standard way to view wealth that most of us probably use at one time or another.

That said, I think this provides an alternative, yet easy way to look at how “wealthy” one really is. Different individuals and families have different money needs, so the value to salaries and accumulated net savings is different for everyone. By leveling the playing field, basing it on **how long you could survive on what you have**, it’s another way to look at where you are in terms of your finances.

What do you think of this concept? Do you have any other approaches to measuring wealth in financial terms?