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What Does It Mean to Be Rich? Defining Wealth by Income, Net Worth Lifestyle
If you pick any 10 people at random off the street and ask them all whether theyd like to be rich, chances are all 10 will say yes. But if you ask those same 10 people what they mean by rich, youre likely to get 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. Still others would give answers that werent expressed in dollar terms at all. Theyd say that wealth means having a big house, a boat, and a private jet or maybe just a comfortable home and goodhealth insurance.
But the truth is, we dont all know what rich means, because it means different things to different people. And ifbecoming wealthyis one of yourpersonal financial goals, its important to think about exactly what wealth means 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.
When Americans talk aboutbeing wealthy, they often focus on having 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 theEconomic Policy Institute (EPI), brought home an average of $1.3 million in 2012. Thats nearly 30 times as much as the average income of the remaining 99% of Americans, so branding this group as outrageously rich doesnt 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 of millions per year. 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, thats still quite a lot compared to the $43,713 thats 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 states top 1%, while in Connecticut, the cutoff is $677,608.
This goes a long way toward explaining why you see many arguments regarding how much income it takes to be really rich. For instance, in 2010, when President Obama proposed raising taxes on families with incomes greater than $250,000,The Fiscal Timesargued 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,childcareand education costs, and other incidentals, the family would never be able to afford luxuries likeprivate schools, avacation 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 doesnt address the biggest problem with using income to define wealth: If you have a high income and spend every penny of it, you end up with nothing at all in savings. That means that if you suddenly lose the job thats providing you with all that income, you become broke 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 ofbankruptcy, isnt most peoples idea of wealth.
Wealthy investors those with a net worth of $5 million or more tend to agree that income isnt the best way to define how rich a person is. In a survey of more than 1,100 such investors bySpectrem Group, only 6% of respondents defined rich in terms of a persons current income. Instead, a majority said that the definition of rich should hinge on a personsnet worth the total of all that persons financial assets, minus the persons outstanding debts.
However, while wealthy investors agree that its possible to define wealth in terms of a specific dollar figure, they disagree widely on just what that figure should be. WhenSpectremasked investors exactly how much money it takes to make a person rich, they gave answers 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 dont necessarily think of themselves as rich largely because their expectations expand along with their income.
Economists generally agree with the investors in the Spectrem survey that net worth is the best way to define wealth. However, they emphasize that net worth isnt just about what you own its also about what you owe. To calculate your net 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, fromstudents loans, to unpaid back taxes.
This means that a person with a very extravagant lifestyle a huge house, several fancy cars,designer clothes, and lavish parties isnt necessarily rich in terms of net worth. If the house and the cars were all paid for with hefty loans, the persons 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 an upside-down loan. The closet full of designer clothes, no matter how much they cost to buy, probably isnt a significant asset, and a big party even a really great one isnt 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 investorWarren Buffett. Although his net worth of over $60 billion makes him one of the richest people on the planet,Investopediareports 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 marriage in 2006 in a 15-minute private ceremony at his daughters home.
Even though investors widely agree that net worth is the best measure of wealth, they often dont see themselves as wealthy even when their net worth measures in the millions. A 2013 report from the wealth-management firmUBSfound 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 would actually take to make them wealthy, these investors gave varying answers. About 16% defined wealth in terms of a specific level of net worth a level most of them, presumably, dont think theyve reached yet. However, the most common answer by far was that wealth means having no financial constraints on activities. In other words, these multimillionaire investors dont consider themselves to be rich because they cant afford to do literally everything they want.
According to this definition, how rich you are doesnt depend just on how much money you have it also depends on what you want to do. If you just want a modest, comfortable lifestyle like Warren Buffetts, you dont need anywhere near the net worth of Warren Buffett to achieve it. By contrast, if you want the glamorous life of Buffetts fellow billionaire Donald Trump, youd better have a Trump-sized fortune to back it up.
Another reason people with more than $1 million in net worth dont 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 atShnugi Personal Finance, which is based on data from theFederal Reserve, these millionaires are wealthier than 90% of all Americans. And according to theGlobal Rich List, theyre even wealthier on a global scale, with more money than 99.44% of all the people in the world.
Yet in a 2015 survey conducted byCNBC, 84% of millionaires described themselves asmiddle classor upper-middle class, while only 9% said they were upper-class or rich. According to wealth experts, the most likely reason for this is that these millionaires arent comparing themselves to the rest of the country or the rest of the world theyre 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 dont consider themselves rich, you might well ask how much they think it actually takes to be rich. According to theWall Street JournalsWealth Report blog, the most common answer in surveys appears to be twice as much money as they currently have no matter that 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 keep looking 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, theres no specific number that can make youfeelrich.
If defining rich in terms of a specific dollar amount either for income or for net worth doesnt really work, maybe it makes more sense to define it in terms of lifestyle. Thats whatThe Washington Postdid in 2012, when multimillionaire Mitt Romney was running for president. It claimed that even those who mocked Romney as a clueless rich guy who didnt 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 dont think of a rich persons lifestyle in those terms. Most wealthy investors polled bySpectrem Groupin 2014 said they didnt own a boat, didnt buy more than $10,000 worth of jewelry in a year, and had never spent more than $50,000 on a car. The onlyluxurya 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 Trump types who do like to live 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 tangible benefits of wealth.
. 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 handling anything from a house fire to a prolonged job loss.
. In the 2013 UBS 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 comfortable lifestyle of a Buffett, with simple pleasures like TV sports andhomemade meals.
. Its been said that time is money, and one of the most important things money can do for you is buy 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.
. 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 work at 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 to make a living at it.
It appears that, for the millionaires surveyed by UBS and Spectrem, wealth isnt 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 arent theessenceof wealth. The real point of wealth is the freedom it can bring you. Wealth means being able to spend your days the way you choose, rather than working 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 wealth is that you dont 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.
Its even possible that in some cases, having too much money can actually make it harder to live a life of contentment. In the Spectrem survey, for instance, about one-third of respondents said that a rich persons life is 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 purpose of wealth, which is to bring you satisfaction.
One rich person who clearly hasnt 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 dont have to be a millionaire to be rich you just have to be living the life that you choose.
As you can see, wealth has many different meanings. So if you aspire to be rich, you need to start by figuring out just what rich means to you. Once you know that, you can figure out the best way to work toward that goal.
If your ideal of wealth is to bring in a specific amount of income, you can look for jobs 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 additional income throughinvestmentsor bystarting a side business. If your object is to have a specific 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 the lifestyle of a rich person, think about what aspects of that life appeal to you most. Home in on what specific trappings of wealth you want owning a big house or a boat, dressing in high-fashion clothes, or being able to spend months traveling around the world. Then start searching for information on how you can live that dream on a reasonablepersonal 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 doesnt 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.
Amy Livingston is a freelance writer who can actually answer yes to the question, And from that you make a living? She has written about personal finance and shopping strategies for a variety of publications, including , m, and the Dollar Stretcher newsletter. She also maintains a personal blog,Ecofrugal Living, on ways to save money and live green at the same time.
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