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October 11, 2005
What is Rich?
I have a problem with surveys that determine the richest people in the world, or in a country, based on their income. After all, it's not how much you make, it's how much you have. Would you rather make $50,000 and have a million dollars in the bank, or make $200,000 and be a million dollars in debt? Some people would say the person who makes $200,000 is four times as wealthy. That's what those surveys say. I say that's bull.
Why judge a person's wealth by their income level? Well, it's a lot easier number to calculate than net worth, which is the real measure of wealth. Most people have just one or two sources of income, but ten or twenty sources, both positive and negative, of net worth. But unfortunately, income is not just the easiest, but the most important number in most of our minds.
Why is income so much more important to us than net worth? My guess is that a lifetime of social pressure to appear rich -- to have nicer houses, cars, and clothes than our peers -- is so strong an influence that it's acceptable to go into debt for it. In the process, we become the very opposite of the image we're trying to portray. Kind of ironic, isn't it?
True wealth (speaking strictly financially -- I realize there are things more important than money) means flexibility, and ultimately, freedom. Flexibility, maybe, to not take the job that isn't right for you. Or to choose the city you live in. Freedom to not have a job at all. To retire and travel the world, or just sit on your butt. It's your freedom, you do what you want with it!
If you want to become wealthy, it's important to know where you stand so that you can properly set goals. Calculating your net worth is not hard. I'll go over it in detail later this week. Until then, I just want to get us thinking about what's important.
Posted by Frank at October 11, 2005 8:15 AM
Comments
Posted by: FMF
at October 11, 2005 1:19 PM
To be the devil's advocate.....
Some could say RICH can't be measured; you can have a networth of 50 bajillion dollars and have a cruddy home life... wealth can be measured many ways and some might say the 'rich' are those who are 'poor'
Posted by: ~Dawn
at October 11, 2005 1:29 PM
True, Dawn. That's why I threw that "speaking strictly financially" disclaimer in there. For example, I value my relationship with my wife much more than I value money. There are lots of ways you can be rich, and I'm only trying to talk about one of them here.
Posted by: Frank
at October 11, 2005 1:45 PM
Excellent points. The freedom to live where you want to live hit home since I am realizing that living where I do is costing me so much money, that I am beginning to think about moving after 15+ years...just to save money!
Posted by: Caitlin
at October 11, 2005 6:06 PM
How many days can I choose *not* to work and still maintain my lifestyle? ...Is MY ACID test for true wealth. This acid test implicitly includes peace of mind.
I'm working on graduating to a large number of days.
Posted by: CMB
at October 11, 2005 8:10 PM
It's not just how much you have, but how much you have divided by how much you need/want. If you have $100,000 and live on $10,000 a year, you're just as "wealthy" as someone who has $400,000 and lives on $40,000 a year. Maybe even more so because most taxes are progressive.
Posted by: Amit Patel
at October 11, 2005 9:35 PM
I like this site as a simple calculation of wealth, based on the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko. It uses his calculation to determine if you are in fact "wealthy".
Posted by: The Dividend Guy
at October 12, 2005 10:50 AM
Although figuring wealth based on income doesn't give you the whole story, I don't think it's very accurate to use _just_ networth either. Imagine someone who's in their 20s, living in the US, just graduated from medical school, and has $100,000 of debt. Say this person is working as a surgeon and making a good salary, is able to rent a decent apartment, and is able to eat 3 meals a day, get good health care, drink clean water, etc. This person's net worth might be -$98,000.
If you're using just networth to calculate wealth, this person would be poorer than someone living in subsaharan Africa, who has a net worth of about 0, who does not have access to clean water, doesn't have access to health care, and is not able to eat 3 meals a day.
I agree with you that just using salary doesn't give you a whole picture of wealth, but, IMHO, neither does net worth.
Posted by: Meaghan Horner
at October 12, 2005 7:10 PM
I agree, Meaghan, with most of what you say, but I'd like to make a subtle counter to your last point.
A high positive net worth means wealth in just about any situation. I'd rather say that net worth doesn't give you the whole picture of *poverty*. Below a certain point, it makes little difference what your net worth is -- what's most important in that situation is the political and economic health of your country. But that doesn't change the definition of what it would mean to be rich.
The surgeon in your example has it pretty good, all things considered. But given the choice, I'd obviously rather be in the same situation with *no* debt. That gives you more of the flexibility I was talking about in the original post.
Thanks for all of the thoughtful comments and good information!
Posted by: Frank
at October 13, 2005 9:06 AM
Most people would say Donald Trump is rich. I remember watching some TV show about "rich kids". Donald Trump's daughter told a story. While walking into the Trump Tower in New York, Mr. Trump turned to his daughter. Pointing to a homeless person, he said "Look, that person is wealthier than I am". Obviously, he was talking about how much in debt he happened to be at the time compared with the homeless person with little or no debt.
Posted by: Jeff
at October 15, 2005 8:19 AM
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WELL SAID!!!! I couldn't have said it better myself (but wish I had). ;-)