The definition of wealth is very simple, calculating it can be done in minutes.
Wealth = Value of assets – Liabilities
If you don’t know how much wealth you have, count up all your money, stocks, real estate, etc. and subtract all your current debt (mortgage balance, credit card, car loan). If the assets are more than the liabilities, congratulations, you have wealth. You are also wealthier than most of the world and about 20% of US households who have zero or negative wealth. What would you consider wealthy? Someone who has more more money than 50% of households, probably not. What about someone with more than 80% of households, that person would be wealthy right? If you were wealthier than your four closest friends that would pretty good right? To achieve that status only takes $293,000 in the US. That number may seem like a lot but it’s hardly anything relative to what society generally views as wealthy. A middle aged couple who are both school teachers could easily amass $300K in their retirement accounts before age 50. In fact they could probably achieve 2-3x that without any secret strategies or additional income outside of their teaching salaries.
What does it take to be considered wealthy? $1 Million? 1%?
While wealth is a measurement with an exact definition, assets – liabilities, wealthy is a status and a state of mind. Wealthy is your wealth relative to your needs. Being wealthy takes a system that generates a never ending supply of cash flow.
Juan is a fisherman in a small coastal town in Mexico that has become a popular vacation spot for international tourists. He bought a fishing boat and equipment for $12,000, he has very little money and no other investments. He also has two employees that work with him that he pays $50/day. The three of them go fishing 6 days a week then sell the catch to local restaurants and tourists for $500 per day. Juan spends $250 each day to pay his employees and purchase gas, tackle, and equipment. His business generates $75,000 per year in profit.
John is a financial analyst at a tech company is Los Angeles. He gets a salary and bonus of $125,000. To get this job he spent 4 years in school getting perfect grades, earning him the opportunity to work 60 hours a week in one of the most expensive cities in the world.
The average living expenses in Juan’s town are $700/month. John spends $7,000/month in LA. So which one is wealthy? Despite this higher income, John is nearly broke and has almost no wealth. John’s boss, the Senior VP of finance at the tech company makes $800,000 per year, and has a net worth of a little over $1 million. Several different managers could fire John at a moments notice, which would leave him in debt and moving back to his parents. Even John’s boss the millionaire is not relatively wealthy. He could lose his job in an instant and his million dollars would only last a couple years without a new form of cashflow. That type of cashflow would be difficult to replace, not many companies are handing out $800,000 jobs.
Fisherman have been working in Juan’s village for over 100 years. Juan has been working for the last 30. In 30 years he’s never once worried about money or getting fired. He has no debt, no boss, and a system that will provide cash for the rest of his career.
Start thinking about wealth in terms of having a system to sustain yourself financially without a day job. Even if that system demands many hours of work. These systems can be created or purchased. Typically, the more time and creativity needed to create and sustain this system, the less money is needed to gdt started. Conversely, systems that require little or no time are very expensive relative to there output. These systems vary anywhere from a micro business to investment real estate to dividend stocks.
When I was in middle school and high school I operated a micro-business. I house-sat for my neighbors. This took zero dollars to get started. I just asked my neighbors if they wanted me to watch their house and pets while they were on vacation. I found two neighbors who were semi retired and had vacation homes that they traveled to regularly. Between the two of them, and a few other neighbors, I had at least one house to watch every weekend. I charged $25 each time. This was much cheaper than what it would cost for professional help and to a 12 year old $25 a week was all the money in the world.
On the other end of the cost-time spectrum is investing in things like dividend stocks. Buying shares of a blue chip companies can pay you 5% annually on your money. This takes zero time, skill or effort, it does however take a lot of money. At 5% per year, you’d need a $1 Million to sustain a $50K income.
Assess your situation, do you have more time or money?
Most people have more time than money. Craft a plan based around your needs, a small business that covers your normal expenses will make you wealthy. If you already have a lot of money or a source of disposable income, the stocks may be the better option.
Either way to consider yourself wealthy you need a system that generates an income higher than your expenses. So $1 Million worth of stock may create the same wealth as the $12,000 fishing boat, it’s all relative to an individuals situation and needs.
While the term “wealthy” can be ambiguous and relative to the specific person, one thing that universally does not equate to wealth is spending. Buying high priced items has absolutely no correlation to being wealthy. Having the ability to buy high priced artifacts will never make you wealthy. Owning a nice car, designer clothes, and a big house will never make you wealthy. So don’t measure success, yours or anyone’s else’s, by the items they buy. Being wealthy is about creating a system to generate cash. Consumer goods by definition do not generate cash, they get consumed and discarded.