When we think “wealth”, we tend to think of mega-yachts, Beverly Hills mansions, trust fund babies, corporate executives, and gas-guzzling private jets. When we think “wealth”, the focus is on tangible resources and indisputable evidence of a comfortable, luxurious lifestyle. But is that the most accurate way to define wealth? In this post, I’ll discuss an alternative definition that centers less on how much you spend and own, and more on your time freedom. I’ll also share exactly how to calculate how wealthy you are. Read on!
Wealth as a function of time, not things
In the popular personal finance book Rich Dad, Poor Dad, Robert Kiyosaki shares his definition of wealth:
“The definition of wealth is the number of days you can survive without physically working (or anyone else in your household physically working) and still maintain your standard of living.”
By this definition, you’re indefinitely wealthy when your passive income streams, investments, and assets generate enough funds to cover your expenses on their own, without requiring you to actively exchange your time for additional income.
This definition of wealth places less emphasis on the ability to purchase expensive things & live a luxurious lifestyle*. Instead, the emphasis shifts to being able to sustain a desired lifestyle without being tied to traditional employment.
*This viewpoint places greater value on time freedom than on material possessions, which won’t align with everyone’s personal spending values.
How to calculate how wealthy you are
Here’s how to calculate how wealthy you are, based on Kiyosaki’s definition:
Kiyosaki doesn’t recommend including savings in your calculation of wealth. He only counts assets that generate earnings.
That being said, I still think it’s interesting to calculate your runway based on all your assets:
For example, I currently have a net worth of about $170k, and my expenses average around $3k/month. If I sold all my investments today, stopped working, and maintained my current standard of living, I’d last 56 months. That’s a little over 4.5 years (or less, thanks to inflation).
Income ≠ Wealth
Many assume that a higher income translates to more wealth, but that isn’t necessarily true. A survey byLendingClub found that, as of March 2023, 49% of six-figure earners reported living paycheck to paycheck. Many individuals, high income and low income alike, find themselves trapped in a cycle of excessive consumption and consumerism, which naturally hinders wealth-building.
Even so, is a high income a prerequisite to building wealth? No. Individuals with lower incomes who keep their expenses lower than their income, invest the difference, and cultivate passive income sources can certainly become wealthy over time.
That being said, high earners do have the opportunity to leverage their income to accelerate their wealth building journey. If they keep their expenses low, high-income earners can leverage the larger difference between their income and expenses to invest in income-generating assets, thereby building wealth at a faster speed than their lower-income counterparts may be able to.
Related: When is lifestyle inflation okay?
Capitalizing on high-paying jobs
I have a friend (let’s call her Claire) who earns about 1.5x as much as I do. Claire doesn’t mind working until age 65 and, due to that outlook on work & wealth, saves/invests significantly less than I do (even though my income is lower than hers).
Related: Here’s how much I earn from my software engineering job.
Claire recently confided in me that she was worried about her next job not paying as much, and wants to take advantage of her current high-paying job as much as possible. It occurred to me then that her definition of taking advantage of the high-paying job was very different from my own. To me, taking advantage of the job would mean using that extra income to build as much wealth as possible. To her, taking advantage of the job meant enjoying the elevated income as much as possible by spending it. I’m not making a judgement call on either approach (in my opinion, saving and spending aren’t morally right or wrong), but I thought the distinction was interesting.
The value of your time changes…over time
I’d like to add another dimension to this definition of wealth:
The value of your time changes throughout your life, depending on your health and happiness.
In other words, a man who has 10 “years of wealth” saved up at age 30 is wealthier than a man who has 15 “years of wealth” saved up at age 60, because the younger man’s healthy years are worth more to him in terms of experiences and potential than the older man’s less-healthy years are.
This is based on a concept Bill Perkins covers in his book Die With Zero (you can read my summary of the book here): as you age, you may have more money, but you likely also have poorer health, which makes it harder to enjoy experiences.
TLDR!
So what’s the TLDR here? If you agree that time freedom > material possessions, then focus on acquiring income-generating assets and creating systems for passive income. Once your monthly income from these sources outpaces your expenses, you’re indefinitely wealthy (at least by Kiyosaki’s definition). My own additional take on it, based on Perkin’s book, is to know when to quit. Once you’ve reached indefinite wealth, you’re doing yourself a disservice by staying in the rat race just to make more money. Once you’ve reached that point of financial freedom, focus instead on life experiences that you can only acquire when you’re your current age.
Related: Here’s how to calculate how much money you’ll need for retirement.
