If you make $700,000 a year, you’re wealthy. If you make $30,000, you’re not. Right? Not in my book. What you have is a high income. But wealth is not about what comes in, it’s about what goes out. So let me propose a few ideas on what makes for wealth, and some ideas for getting there.
Wealth is measured by how much you hold on to. If your checking account resembles a sieve, you’re not wealthy. If money goes out as fast as it comes in, or (even worse) in larger amounts than what is coming in, you’re not wealthy no matter how much the inflow is. My guess is, you have a lot of junk.
If you have a lot of STUFF, you’re nowhere near a wealthy as you think. Don’t believe me? Go to a couple of resale shops or garage sales and see what your stuff is actually worth. I never count household goods as meaningful in an asset statement. The only time in financial planning land that your prized possessions are worth considering is when we’re looking at insurance.
If you wouldn’t be willing to sell it, and don’t know how to do it, it’s not an asset. One of my favorite shows is Antiques Roadshow, but you just know most of this stuff is never going to be sold, so really, it has no market value except to heirs. If you have a wine collection, come on, you’re going to drink it. Doll collection? You’re going to be dusting it for your lifetime. And paying insurance on it. Yes, these things can be immensely satisfying to possess and if you can afford it (i.e., you’re already wealthy), well, enjoy. I understand that people do upgrade collections and sell a case of wine now and then, but for the most part these are luxurious hobbies that your heirs will be fighting over. The market for these investments can be very illiquid (do you know how to sell a button collection?), costly to sell (auction commissions), expensive to protect and maintain, and carry a high income tax (a whopping 28%).
On the simplest level, you’re wealthy if you have excess beyond basic needs. By this standard, virtually everyone in the U.S. is wealthy compared to the rest of the world. Even people who would be considered in dire poverty in most of the Western economies are wealthy compared to the Third World. If you get hit in the street here, an ambulance will pick you up, take you to the hospital, and you’ll get treatment. If that ever happens to you, my personal experience says that’s wealthy.
On the next level, you’re wealthy if you meet your basic needs and still have any left. Here’s where we can begin to have an impact on how wealthy we are or become. As Dickens’ character Mr. Micawber says, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” For an example, my parents were wealthier than many of the clients I see. Although my dad never made more than $28,000 in his life and my mom was primarily a homemaker, they had more than enough to live comfortably in the home they loved, eat at restaurants they enjoyed, bail out their daughter during several financial crises, and die with money remaining in their investments. Was the house 5,000 square feet? Were the restaurants the kind where the maître d’ walks backwards? Did they expect their daughter to pay them back? No, no, and no (but I did).
I’m not saying that you have to live on beans and shop only on Craigslist. But somehow, you have to live lower than the limit of your income. Numbers? At least 20% lower—and that 20% goes into 1)emergency stash 2)retirement 3)long term goals 4)investments (business startups, real estate, stock market, whatever). Without savings, you really have no way to take advantage of opportunities that come your way and no ability to ride out the waves of uncertainty and surprises that life brings. Peace of mind is real wealth.
Up to now I’m only talking about material wealth (hey, I’m a financial planner).But of course I think there are many things that make you wealthy which have much more value than money: the love and respect of your children, the ability to adapt to challenging circumstances, the ability to make yourself happy without spending money, the sense of having done something worthwhile in your life, friends that will step in when you’re down. I wish I could help with those things, too, but getting a good financial plan can really free your focus to move on to those higher levels of wealth.
