What is Wealthy?

| August 4, 2015 | 0 Comments

The adjective "wealthy" is typically used to describe a person (or family) who has a lot of money and/or possessions.  I think there is more to being wealthy than just having a lot of "stuff" (or at least more than your brother-in-law).  Consider this scenario, if someone has money and material possessions worth $10 million, but has annual expenses of $2 million, his money will not last much longer once his income source stops.  To me, a better way to define wealth is if someone can live indefinitely off his or her nest egg.  I would consider someone wealthier who has $2 million in savings, but only spends $80,000 per year.  $80,000 is 4.0% of $2 million and should last a lifetime following the 4% Rule.

It's not the amount of money people save that determines wealth; it's the percentage of that nest egg that they spend.  This is seen in the countless professional athletes who are bankrupt within 10 to 20 years of retiring (and some within four or five years).  It's not only the naive athlete who doesn't grasp this concept.  The problem runs through most neighborhoods throughout our country.  Too many people are concerned with living a lifestyle that is beyond their income's ability to allow for proper savings.

I speak with people on a regular basis whose incomes range from less than $100,000 per year to well over $500,000 per year and I've found the ones who make the most are not always the wealthiest.  Often, with higher incomes comes much greater spending.  Those who can control their spending have a much greater opportunity to become wealthy, even if they cannot afford to buy the yacht they've been dreaming of.

The beauty of spending a lower portion of your income is that you won't need to save as much to retire and what you save will last longer.  For example, a family that makes $200,000 and saves 20% of their income is actually living off $160,000.  Using the 4% Rule, they could retire when they reach an investment balance of $4,000,000 versus $5,000,000 for the same family that spends all $200,000 every year.  Then again, the family that spends all of their income wouldn't have a nest egg anyway and will never be able to retire and live the way they want to live.  This little example doesn't even factor in additional spending cuts a family could have as they near their retirement age, such as a mortgage that's paid off and their kids' college tuitions that are paid off (or at least their responsibility any longer).

No dictionary I searched had a specific number associated with when someone becomes "wealthy" or even mentioned debt.  Instead of striving to have more material possessions that could make you appear wealthy, I suggest striving to have a savings/investment balance large enough to produce income that will allow you to retire when you want.  For most people, that goal is sooner than later.

Filed Under: Spending

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