Rich Life Stories – Defining Wealth by Income, Net Worth & Lifestyle (P2)

Rich Life Stories – Defining Wealth by Income, Net Worth & Lifestyle (P2)

If you pick any 10 people at random off the street and ask them all whether they’d like to be rich, chances are all 10 will say yes. But if you ask those same 10 people what they mean by “rich,” you’re 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 weren’t expressed in dollar terms at all. They’d say that wealth means having a big house, a boat, and a private jet – or maybe just a comfortable home and good health insurance.

But the truth is, we don’t all know what “rich” means, because it means different things to different people. And if becoming wealthy is one of your personal financial goals, it’s 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.

Evaluating Net Worth

Even though investors widely agree that net worth is the best measure of wealth, they often don’t see themselves as wealthy even when their net worth measures in the millions. A 2013 report from the wealth-management firm UBS found 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, don’t think they’ve 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 don’t consider themselves to be rich because they can’t afford to do literally everything they want.

According to this definition, how rich you are doesn’t 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 Buffett’s, you don’t need anywhere near the net worth of Warren Buffett to achieve it. By contrast, if you want the glamorous life of Buffett’s fellow billionaire Donald Trump, you’d better have a Trump-sized fortune to back it up.

Comparing Net Worth

Another reason people with more than $1 million in net worth don’t 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 at Shnugi Personal Finance, which is based on data from the Federal Reserve, these millionaires are wealthier than 90% of all Americans. And according to the Global Rich List, they’re 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 by CNBC, 84% of millionaires described themselves as middle class or 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 aren’t comparing themselves to the rest of the country or the rest of the world – they’re 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 don’t consider themselves rich, you might well ask how much they think it actually takes to be rich. According to the Wall Street Journal’s Wealth Report blog, the most common answer in surveys appears to be twice as much money as they currently have – no matter what 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, there’s no specific number that can make you feel rich.

Comparing Net Worth Warren BuffettWealth as Lifestyle

If defining “rich” in terms of a specific dollar amount – either for income or for net worth – doesn’t really work, maybe it makes more sense to define it in terms of lifestyle. That’s what The Washington Post did in 2012, when multimillionaire Mitt Romney was running for president. It claimed that even those who mocked Romney as a clueless rich guy who didn’t 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 – don’t think of a rich person’s lifestyle in those terms. Most wealthy investors polled by Spectrem Group in 2014 said they didn’t own a boat, didn’t buy more than $10,000 worth of jewelry in a year, and had never spent more than $50,000 on a car. The only luxury a 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.

These include:

Security. 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.

Comfort. 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 and homemade meals.

Time. It’s 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.”

Freedom. 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.