Using the Earning Assets to Total Assets Ratio to Measure Your Wealth

Earning Assets to Non-Earning Assets Ratio
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If you want to live comfortably, sleep soundly, and retire in style, there is a trick you can use to determine how much progress you are making on your journey to financial independence. This writer adopted it from bank holding companies, which differentiate between earning assets and non-earning assets on their balance sheet when giving an account of their business results to shareholders and regulators. It can just as easily be applied to an individual person or family. 

Banks use the earning assets to total assets ratio as a quick method to determine the percentage of their balance sheet that is working to generate income. All else being equal, the differences between rich and poor families are their amounts of earning assets and their percentages of earning assets relative to non-earning assets.

Defining Earning Assets and Non-Earning Assets

First, let's define the two key terms.

  • Earning Assets are those that directly generate income, such as stocks that pay dividendsbonds that pay interest, real estate properties that generate rental income, copyright and patents that bring in licensing fees, and machinery that enables you to produce goods for sale at a profit.
  • Non-Earning Assets are things that do not generate income for the owner. A car is an example of a non-earning asset because it drains money from your life—unless you own a delivery service or drive for Lyft or Uber.

How to Calculate the Earning Assets to Total Assets Ratio

To calculate the earning assets to total assets ratio, you need to use the following formula:

(Beginning Earning Assets for the Year + Ending Earning Assets for the Year) ÷ 2
-------------- divided by --------------
(Beginning Total Assets for the Year + Ending Total Assets for the Year) ÷ 2

Here's an example of how to calculate the ratio using a guy named Lance who likes investing his money to generate passive income. While he enjoys working, collecting dividends, interest, and rents is one of the great joys in his life. He starts the year with $100,000 in bonds, $250,000 in stocks, $250,000 in rental property, $50,000 in cars, $300,000 in a personal residence, and $75,000 in personal assets such as furniture and clothing. During the year, he saves $80,000 and invests it all in additional stocks, bringing the new total to $330,000.

We need to begin by separating out the earning assets from the non-earning assets and adding up the total of all assets as of the beginning of the year:

  • Beginning Year Earning Assets = $600,000 ($100,000 in bonds + $250,000 in stocks + $250,000 in rental property)
  • Beginning Year Total Assets = $1,025,000 ($100,000 in bonds + $250,000 in stocks + $250,000 in rental property + $50,000 in cars + $300,000 in personal residence + $75,000 in personal assets)

Now, we need to calculate the same numbers as of the end of the year:

  • Ending Year Earning Assets = $680,000 ($100,000 in bonds + $330,000 in stocks + $250,000 in rental property)
  • Ending Year Total Assets = $1,105,000 ($100,000 bonds + $330,000 in stocks + $250,000 in rental property + $50,000 in cars + $300,000 in personal residence + $75,000 in personal assets)

Now we can put them into the formula to find the earning assets to total assets ratio:

Step One:

 ($600,000 + $680,000) ÷ 2
--------- divided by ---------
($1,025,000 + $1,105,000) ÷ 2

 Step Two:

 ($1,280,000) ÷ 2
--------- divided by ---------
($2,130,000) ÷ 2

Step Three:

$640,000
--------- divided by ---------
$1,065,000

Step Four:

= 0.60, or 60%

This tells us that 60% of the assets on Lance's personal balance sheet, or 60 cents of every dollar he holds, is earning money for him. In a very real sense, that capital is out there working 24 hours a day, 7 days a week, 365 days a year on his behalf.