What is the Ultimate Measure of Wealth?
Is it the Cash in the bank? The number of Properties acquired? or the the amount of Stock Certificates owned?
If the measurement is based on this, we are ignoring the other side of coin which are the liabilities (e.g. loans, debts, and mortgages).
So what is the ultimate Measure of Wealth? The answer is NET WORTH.
NET WORTH = ASSETS – LIABILITIES
Person A who has P100,000 in the bank without any debts is wealthier than Person B who has P10,000,000 in total assets but has P20,000,000 in debts.
Why? Because based on the Formula, their respective NET WORTH is as follow:
Person A = P100,000 – 0 = P100,000
Person B = P10,000,000 – P20,000,000 = (-P10,000,000)
My first two articles, The Ultimate Foundation of Wealth and The Biggest Investment Risk, discussed how we can create wealth and how we can protect it.
After accumulating wealth, the objective is to conserve that wealth especially upon the transfer to the next generation.
Wealth Conservation is a component of ESTATE PLANNING which is best defined by one of my mentors Atty. Leo Cabrera:
Estate Planning is effectively planning the conservation and distribution of accumulated wealth to the next generation without losing its value.
And this entails knowledge in the Family Code and Tax Code.
When a person dies, the heirs need to pay 6% Estate Tax of the Net Estate of the deceased before the wealth can be transferred to them.
For example, if the person’s net estate is equal to P100 Million, the heirs need to pay P6 Million to the Bureau of Internal Revenue before they can transfer the properties, withdraw bank deposits, and sell other assets (by law, all assets are frozen until estate tax is paid).
With this example, that is a 6% decrease in net worth.
That is where an effective estate plan comes in.
An effective estate plan makes sure that there is no lost in value in the transfer of wealth to the next generation; and if possible increase that wealth through the proceeds of life insurance.
Remember:
The Ultimate Measure of Wealth is Net Worth and the objective is to make sure that the Net Worth will not decrease in value through Wealth Protection and Wealth Conservation.
Your Millennial Wealth Planner,
Harold Q. Gardon, CWP, CEPP
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