If you pick any 10 people at random off the street and ask them allwhether they’d like to be rich, chances are all 10 will say yes. But if you ask those same 10 people what they mean by “rich,” you’re likely toget 10 different answers.
One person, perhaps, would say that a million dollars is enough to make you rich, while another would say that it takes 10 million. Stillothers would give answers that weren’t expressed indollar terms at all. They’d say that wealth means having a big house, a boat, and a private jet – or maybe just a comfortable home and good health insurance.
But the truth is, we don’t all know what “rich” means, because it means different things to different people. And if becoming wealthyis one of your personal financial goals, it’s important to think about exactly what wealthmeans to you. You need to have a clear idea of what your dream of wealth looks like – what kind of rich person you want to be –before you can come up with a plan to make that dream a reality.
Wealth as Income
When Americans talkabout being wealthy, they often focus onhaving a high income. For example, during the Occupy Wall Street demonstrations, protesters adopted the rallying cry, “We are the 99%” – setting themselves aside from the top 1% of earners who, according to the Economic Policy Institute (EPI), brought homean average of $1.3 million in 2012. That’s nearly 30 times as much as the average income of the remaining 99% of Americans, sobranding this groupas outrageously rich doesn’t seem, at first, like much of a stretch.
However, there are a few problems with this definition of wealth. First of all, the average income for the top 1% is skewed upward by the even smaller percentage who make extremely high incomes, amounting to tens ofmillions peryear. The income threshold for the top 1% – the amount of income you need to make to be part of this group – is a much lower$385,195, according to the EPI.
Admittedly, that’sstill quite a lotcompared to the $43,713 that’s the average income for the rest of the American population. However,this figure is for the entire country – in specific states, the earnings of the top 1% can be much higher or much lower.In Arkansas, for instance, anyone with an income of more than$228,298 is part of the state’s top 1%, whilein Connecticut, the cutoff is$677,608.
This goes a long way toward explaining why you see many arguments regarding how much income it takesto be reallyrich. For instance, in 2010, when President Obama proposed raising taxes on familieswith incomes greater than $250,000, The Fiscal Times argued that in many parts of the country, a family of four would actually have a hard time making ends meet on that income. Between taxes, housing, food, transportation, childcare and education costs, and other incidentals, the family would never be able to afford luxuries like private schools, a vacation home,a country club membership, or designer clothes – in other words,the lifestyle that most people associate with the word “rich.” Eventually, the president and Congress settled on a deal that raised taxes only on families with incomes greater than $450,000, effectively setting that as the new bar for what it takes to be rich in America.
However, simply adjusting the cutoff doesn’t address the biggest problem with using income to define wealth: If you have a high incomeand spend every penny of it, you end up with nothing at all in savings. That means that if you suddenly lose the job that’s providing you with all that income, youbecomebroke overnight, with nothing left to live on. Being in a precarious position like this, where a single change could take you from a comfortable life to the edge of bankruptcy, isn’t most people’s idea of wealth.
Wealth as Net Worth
Wealthy investors – those with a net worth of $5 million or more – tend to agree that income isn’t the best way to define how rich a person is. In a survey of more than 1,100 such investorsbySpectrem Group, only 6%of respondents defined “rich” in terms of a person’s current income. Instead, amajority saidthatthe definition of“rich” should hinge ona person’s net worth– the total of all that person’s financial assets, minus the person’s outstanding debts.
However, while wealthyinvestors agree that it’s possible to define wealthin terms of a specific dollar figure, they disagree widely on justwhat that figure should be. WhenSpectremasked investors exactly how much money it takes to make a person rich, theygaveanswers ranging from $1 million to more than $5 million. And other studies of investors show that even those who have achieved these levels of wealth don’t necessarily think of themselves as rich – largely because their expectationsexpand along with their income.
Understanding Net Worth
Economists generally agree with the investors in the Spectrem survey that net worth isthe best way to define wealth. However, they emphasize that net worth isn’t just about what you own – it’s also about what you owe. To calculate yournet worth, you add up all your assets – money in the bank, investments, your house, your car, and so on – and then subtract all your debts, from students loans, to unpaid back taxes.
This means thata person with a very extravagant lifestyle – a huge house, several fancy cars,designer clothes, and lavish parties –isn’t necessarily rich in terms of net worth. If the house and the cars were all paid for with hefty loans, the person’s actual equity – the amount that belongs to the so-called owner – could be quite low. It could even be negative if the house or cars have fallen in value, leaving the buyer with anupside-downloan. The closet full of designer clothes, no matter how much they cost to buy, probably isn’t a significant asset, and a big party – even a really great one – isn’t an asset at all.
By contrast, a person whose lifestyle appears to be modest can actually have a sizable net worth. The classic example is investor Warren Buffett. Although hisnet worth of over $60 billion makes him one of the richest people on the planet, Investopedia reports that he still lives in the same Omaha house he bought for $31,500 back in 1958. He scorns luxury cars, and he celebrated his second marriagein 2006 in a 15-minute private ceremony at his daughter’s home.
Pro tip: When you sign up for a Personal Capital account you will have access to your continuously update net worth calculation.
EvaluatingNet Worth
Even thoughinvestors widely agree that net worthis the best measure of wealth, they often don’tsee themselves as wealthyevenwhen theirnet worth measuresin the millions. A 2013 report from the wealth-management firm UBSfound that only 28% of investors with a net worth between $1 million and $5 million answered “yes” to the question, “Do you consider yourself wealthy?” Even among investors with more than $5 million, only 60% gave a positive answer.
When asked what it wouldactually take to make themwealthy, these investors gave varying answers. About 16% definedwealth in terms of a specific level of net worth – a level most of them, presumably, don’t think they’ve reached yet.However, the most common answer by far was that wealth means having “no financial constraints on activities.” In other words, these multimillionaire investorsdon’t consider themselves to be rich because they can’t afford to do literally everything they want.
According to this definition, how rich you are doesn’t depend just on how much money you have – it also depends on what you want to do. If youjust want amodest, comfortable lifestyle like Warren Buffett’s, you don’t need anywhere near the net worth of Warren Buffett to achieveit. By contrast, if you want the glamorous life of Buffett’s fellow billionaire Donald Trump, you’d better have a Trump-sized fortune to back it up.
ComparingNet Worth
Another reason people with more than $1 million in net worth don’t always see themselves as wealthy is that all the people they hang out with have just as much money–or more.According to the net worth calculator at Shnugi Personal Finance, which is based on data from the Federal Reserve, these millionaires are wealthier than 90% of all Americans. And according to the Global Rich List, they’re even wealthier on a global scale, with more money than 99.44% of all the people in the world.
Yet ina 2015survey conducted by CNBC, 84% of millionaires described themselves as middle class or upper-middle class, while only 9% said they were upper-class or rich. According to wealth experts, the most likely reason for this is thatthese millionaires aren’tcomparing themselves to the rest of the country or the rest of the world – they’re only looking at their own social group. Even among Americans with a net worth of $5 million or more –which puts them in the top 0.8% in the United States, and the top 0.06% in the world – only 11% describe themselves as wealthy.
Since millionaires and even multi-millionaires apparently don’t consider themselves rich, you might well ask howmuch they think it actually takes to berich. According tothe Wall Street Journal’s Wealth Report blog, the most common answer in surveys appears to be twice as much money as they currently have – no matter what that figure is. Those making $100,000 a year think it takes at least $200,000 a year to be rich; those with a net worth of $3 million think it takes $6 million.
So when it comes to net worth, the answer to the question, “How much makes you rich?” appears to be another question: “Compared to whom?” To be among the richest 1% in the entire world takes only $770,000 in net worth (as opposed to income); to be in the richest 1% in the USA takes closer to $8 million in net worth.But as long as you keeplooking up rather than down – comparing yourself to the Warren Buffets of the world – then wealth will always seem to be somewhere out of reach. In other words, while $1 million or more can make you rich compared to most people, there’s no specific number that can make youfeel rich.
Wealth as Lifestyle
Wealth as LifestyleIf defining “rich”in terms of a specific dollar amount – either for income or for net worth – doesn’t really work, maybeit makes more senseto define it in terms of lifestyle. That’s what The Washington Post did in 2012, when multimillionaireMitt Romney was running for president. It claimedthat eventhosewho mockedRomney asa clueless rich guy who didn’t understand the problems of everyday Americans secretly wanted to have the kind of life he has, complete with a big house, a bunch of fancy cars, and a garage with an elevator to move those cars around.
As it turns out, though, many people – including people with high net worth – don’t think of a rich person’s lifestyle in those terms. Most wealthy investors polled bySpectrem Groupin 2014 said they didn’t own a boat, didn’t buymore than$10,000 worth ofjewelry in ayear, and had never spent more than $50,000 on a car. The onlyluxury a majority of the respondents admitted to enjoying was expensive vacations, with 60% of them spending at least $10,000 a year on travel.
Obviously, there are some wealthy people – the Donald Trumptypes –who do like tolive a flashy lifestyle, with the finest clothes, cars, and food money can buy. But there are others –the Warren Buffett types – who prefer to focus on other,less tangiblebenefits of wealth.
These include:
- Security. When Spectrem asked wealthy investors what it means to be rich in America, the most popular answer by far – chosen by 80% of respondents – was “more security.” People who are struggling financially spend every penny they make – or possibly even more – just paying their day-to-day bills, and a single major disaster – such as a car crash or a serious health problem – could easily drive them into bankruptcy.Wealthy people, by contrast, can feel confident about handlinganything from a house fire to a prolonged job loss.
- Comfort. In the 2013UBS survey,10% of investors said their idea of wealth was “ensuring a comfortable lifestyle” – not just for themselves, but also for future generations of their family.Instead of the glamorous life of a Trump, they aspire to the comfortablelifestyle of a Buffett, with simple pleasures like TV sports and homemade meals.
- Time. It’s been said that time is money, and one of the most important things money can do for you isbuy you more free time. 19th century economist Thorstein Veblen, in his famous book “The Theory of the Leisure Class,” argued that the aristocrats of his day were those who could afford to spend their time on recreation rather than work. The same idea showed up in the UBS survey, in which 10% of respondents said their idea of wealth was “never having to work again.”
- Freedom. Perhaps the broadest possible definition of wealth is the one expressed in “The One Minute Millionaire,” by Mark Victor Hansen and Robert G. Allen: “Wealth is Freedom.” This is probably the idea of wealth that the investors in the UBS survey had in mind when they said wealth meant having “no financial constraints on activities.” Being rich means having the freedom to do just as you like – to workat a job you love without having to worry about how much it pays, or to give up work completely to pursue some other interest without needing tomake a living at it.
Wealth asLife Satisfaction
It appears that, for themillionaires surveyed by UBS and Spectrem,wealth isn’t just about how much money you have, or even about what you do with it. Income, net worth, and lifestyle are all ways of measuring wealth, but they aren’t the essenceof wealth.The real point of wealthis thefreedomit can bringyou. Wealth means being able to spend your days theway you choose, rather thanworking to earn more money or worrying about how much you have already.
Looked at in this way, wealth means life satisfaction – the ability tolive the kind of life that makes you happy.The most important thing about this kind of wealthisthat you don’t have to be a millionaire to achieve it – rather, you only have to have enough to meet your personal needs.If you can live a life that satisfies you on an income of just $15,000 a year, then $15,000 a year is all it takes to make you rich.
It’s even possible that in some cases, having too much money can actually make it harder to live a life of contentment. In the Spectremsurvey, for instance, about one-thirdof respondents said that a rich person’s lifeis “carefree,” but an even higher number – closer to 40% – described it as “complicated.” And while 28% said that wealth brings “more happiness,” an equal number said that it meant “more responsibility” – and only 20% said that wealth brings “more fun.”
For some people, perhaps, the whole process of making money, investing money, and keeping track of how much they have turns into an end in itself. They get so absorbed in it that they lose sight of the real purposeof wealth, which is to bring you satisfaction.
One rich person who clearly hasn’t fallen into this trap is – once again – Warren Buffet, who once said in an interview that “the ultimate luxury [is] really getting to do what you love to do everyday.”In other words, you don’t have to be a millionaire to be rich– you just have tobe living the life that you choose.
Final Word
As you can see, wealth has many different meanings. So if you aspire to be rich, you need to start by figuring out justwhat “rich” means to you. Once you know that,you can figure out thebest way to work toward that goal.
If your ideal of wealth is to bring in a specific amount of income, you can look forjobs that bring in that amount of income, and then determine what you need to do to qualify for those jobs. You can also look at ways to bring in additionalincome through investments or by starting a side business.If your objectis to have aspecific level of net worth, start crunching some numbers – figure out how much you need to save each month, and how much you need to earn on your investments, to reach that goal in a specific time.
If your dream is to live thelifestyle of a rich person, think about what aspects of that life appeal to you most. Home inon whatspecific trappings of wealth you want – owning a big house or a boat, dressing in high-fashion clothes, or being able to spend monthstraveling around the world. Then start searching for information on how you can live that dream on a reasonable personal budget. Clothes, travel, and even houses can be yours for less if you know where to look.
Finally, if your dream of wealth is a dream of freedom – of living the life that really matters to you, free from worries about money – then start by figuring out just what your ideal life looks like. For example, if you have a dream job, but it doesn’t bring in much money, maybe you can still have that job if you can just figure out a way to cut your living expenses down to a bare-bones level. Perhaps for you, living a truly rich life means spending less, not more.
What does your dream of wealth look like?
