Financial independence means having sufficient financial resources to support oneself without relying on continuous income from employment. This is a cornerstone of genuine wealth. In practical terms, it refers to reaching a point where your assets generate enough revenue to cover your living expenses. Thus, a person’s net worth becomes a crucial indicator of wealth.

To calculate your net worth, you should combine the total value of your assets minus liabilities. For instance, someone might not appear wealthy by conventional standards but could possess significant investments and assets that ensure long-term financial security.

Furthermore, it is vital to distinguish between income and assets in order to understand wealth. High earners often seem affluent, yet without substantial assets, they may not be truly wealthy. Consider a firefighter and a secretary with a combined income of $55,000. If they have accumulated a net worth of $460,000, they are relatively wealthier than a doctor earning $560,000 annually but with a net worth of only $1.1 million. The firefighter and secretary have likely embraced a lifestyle that prioritizes savings and investments over spending, enabling them to achieve a significant net worth relative to their income and age.

A practical approach to determining whether someone is wealthy involves comparing their net worth to what is expected for their income and age. This method factors in both how much a person earns and how long they have been earning it. We’ll dive into this formula in the following chapter.