The Residual Wealth Ratio is the ratio of annual residual income to yearly living expenses.
It enables you to calculate how much cash flow the “business of you” has from your investments and other residual income-generating sources like real estate or online businesses.
To calculate the Residual Wealth Ratio of annual residual income to annual expenses, you can follow these steps:
Determine Your Annual Residual Income
Residual income refers to earnings derived from sources that don’t require active involvement, such as real estate investment income, stock dividends, interest (CDs, Bonds, etc.), royalties, or online residual income-generating businesses.
Add up all your residual income (NET income – after any investment or business expenses) sources to find your total annual passive income.
Calculate Your Annual Expenses
You regularly incur these costs to maintain your lifestyle, such as rent or mortgage payments, utilities, groceries, transportation, insurance, and discretionary spending like entertainment or travel.
Add up all your expenses to find your total annual expenses.
Calculate your effective tax rate percentage.
Subtract that percentage amount from your residual income.
Calculate the ratio
Divide your annual residual income (adjusted for taxes) by your annual expenses.
Residual Wealth Ratio = (Tax Adjusted Annual Residual Income) / (Annual Expenses)
The Residual Wealth Ratio will give you an indication of how well your residual income covers your expenses.
Residual Wealth Ratio – What it Means
I would consider a safer Residual Wealth Ratio to be 2.5-3.5 to deal with emergency expenses and fluctuations in the residual income streams.
If the ratio is less than 1, your passive income does not cover your expenses. You must rely on other income sources or reduce your expenses to achieve financial independence.
If the ratio is equal to 1, your passive income exactly covers your expenses.
The Concept of “The Business of You”
“The business of you” is a concept that encourages individuals to approach their personal and professional lives with an entrepreneurial mindset. This is the idea behind the Residual Wealth Ratio, meaning to treat your life as a business and you are the CEO.
It’s about treating yourself as a brand or business, taking charge of your career, and proactively seeking opportunities for growth and success. This idea revolves around self-promotion, personal branding, networking, and continuous learning to stay relevant in a rapidly changing world.
Here are a few of the critical aspects of the “business of you” concept:
Financial management: (where the Residual Wealth Ratio comes in) Managing your finances like a business, investing in yourself (e.g., through education and professional development as if making a business investment), and planning for long-term financial goals.
Personal branding: Creating a solid personal brand, both online and offline, that showcases your unique skills, experiences, and strengths. This includes maintaining an active presence on social media, professional networking platforms, and personal websites or blogs.
Continuous learning: Pursuing new knowledge, skills, and experiences to stay relevant in your field and adapt to changes in the job market.
Goal-setting: Defining your personal and professional goals, creating a roadmap to achieve them, and regularly assessing your progress.
You can take control of your future by focusing on the above and using the available tools to leverage your efforts (this is Levered Income, after all).