The media talks about millionaires and billionaires when they use the term wealthy, but do you need a billion dollars to be wealthy? For many people, being wealthy is their dream. But, how do you know if you are wealthy? This article looks at ways you can measure your wealth and how you compare to others on the planet.
Some of the common measures of wealth include: net worth and the passive income to expenses ratio. These measures are discussed below; with some less conventional measures.
It is not difficult to understand that if you cannot afford to buy the basic things that you need to live, then, financially, you are not wealthy. But, once you can buy anything you need to survive it becomes more difficult to determine your wealth. The basic net worth calculation will tell you how much money you would have if you sold everything and paid off all of your debts. If the amount is positive, then you might be wealthy.
For example, if you have $250,000 in assets and $100,000 in liabilities, then your net worth is $150,000.
But, how much of a positive net worth do you need to be wealthy? The net worth calculation does not tell you whether your net worth number means that you are wealthy. Nor does this calculation make any allowance for the cost of living of your preferred lifestyle in the location that you live. It is usually recommended that you compare your net worth to the median net worth of other people in your general age or income category. This assumes that if your net worth is above the middle value (median), then you are doing well. One error in this view is that it assumes people above the median are doing well.
Another way to look at your net worth and what you can do with it is to calculate how long it will last. This is the calculation your financial planner does when they turn your attention to your retirement nest egg.
For example, if you have $1,000,000 in assets, invested at 5% a year and you withdraw $60,000 a year, then you could last thirty-five (35) years on that $1,000,000. This example does not consider the effect of inflation on your effective buying power.
That’s great! Save a million dollars by the time you are fifty-five and you could make your money last until you are ninety.
Another Way to Look at It
Robert Kiyosaki, in his best-seller “Rich Dad Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and the Middle Class Do Not!”, uses a variation of R. Buckminster Fullers’ definition of wealth, which is “Wealth is a person’s ability to survive so many number of days forward . . . or, if I stopped working today, how long I could survive.” This approach nicely accounts for your lifestyle preference and any other variables, unique to you that affect your expenses. It is similar to your financial planner’s retirement nest egg analysis. However, Kiyosaki asks that you consider your passive income.
Passive income is income you receive from things other than your job. For example, it could be interest you receive from a bond, or rental income from a property you own.
Now, let’s look at an example of what it means. In this example, you have $1,000,000 invested at 5%, you withdraw $60,000 a year, and you have extra passive income of $1,000 a month. With the extra passive income your $1,000,000 would last forever. That’s right, forever. Combining the 5% interest on your savings, and the $1,000 a month in passive income means your savings increase slightly each year.
The Ideal Situation
Carrying the example to the ideal of Kiyosaki’s passive income strategies, ask yourself when your retirement could start in our examples above if your had $60,000 in passive income. That answer is you could retire today.
Having time to do the things that you want to do is valuable to everyone. How you value that is a personal decision. But, if you have enough time in your day to do everything that you want to do, then you are doing something right. Free time is often the commodity that people appreciate most when they achieve financial success.
All the time and money in the world is difficult to enjoy if your health is poor. If you are healthy and active, then you have a commodity that millions of people worldwide would like to have.
Your circle of friends and family is a measure of wealth as well. Humans are social creatures and the larger your social network the more enriched your life tends to be.
Alternative Views of Wealth
Money is not everything. Measuring wealth in terms of money alone provides a one-sided view of wealth. Other ways to measure wealth include: time, health, and social networks.
There are many ways to evaluate your wealth. Financial wealth is the most common measure used, but free time, health and social network size are part of the abundant lifestyle that wealth infers. When you measure your wealth consider all of these ideas.