Being wealthy can be defined in many ways. The Merriam-Webster dictionary defines wealthy as:
1 : having wealth : very affluent
2 : characterized by abundance : ample
This definition of course is very vague. What exactly is “very affluent”? Being a numbers guy, I like specifics, and like to measure things like wealth.
I personally like to define wealthy as having enough money where you (and your family) would never have to work another day again (if you chose to). You can live off the fat of the land, otherwise known as your savings. That is what truly makes you affluent. In other words, your savings will outlive you. After all, you can’t take it with you to the grave.
For the average American to become wealthy, it takes a lot less than what most people think. Most American families can meet the basic necessities for currently under $60,000 annually. This is where budgeting becomes oh so important. If you know your annual expenses, you know how much you need If you can generate more than your expenses from your savings on a annual basis, you can consider yourself set for life.
Keep in mind, the overall life expectancy for an American is currently around 78 years old. So to be wealthy the magic number for most people today seems to be around $2 million saved. This of course depends upon your age, and annual expenses.
Of course many people fall into the lifestyle creep problem. You’ve heard the movie stars such as Nicholas Cage being forced to sell his house, and also behind on his taxes.
Nicolas Cage had to live the lifestyle of his peers. He obviously let his lifestyle get more expensive than his savings. During the accumulation (saving) stage of your life, you must keep luxury items at a minimum. Though lifestyle, by it’s very definition infers luxury items, and not the bare necessities. To meet the $60k annual budget, I’m taking about the basics: shelter, food, and clothing. Yes a family of four can live in a 10,000 square foot home, but you don’t have to for survival. You could just as easily live in a modest 1,500 square foot home.
Let’s talk about specifics. Use this basic formula to determine how wealthy you really are. Let’s use me as an example: I am currently 40 years old, and for my family it costs us approximately $60k to run our household. So in order to consider us to be truly wealthy, we need $2,340,000 (approximately 38 years remaining of my life X $60,000 annual expenses) in savings at my current age. Obviously, as I get older it will take less money to make me wealthy, because my expected remaining years on Earth will decrease.
The other great question you can ask yourself if you aren’t currently wealthy, how long could you last with your existing savings? If you and your spouse (assuming you are married) were to stop working tomorrow, how long could you last not working? A few months? A few years?
Take your annual spending, and divide it by your savings. Imagine if you cashed out of all savings from retirement, a business you may own, a rental property, etc. Assume current fair market value. All the assets you own, except your primary residence. You’ll always need some place to live so it does not count.
The amount of years you could survive with this savings tells you how much along you are on the way to becoming wealthy. This calculation is obviously very basic, and is only a paper napkin estimate. It does not take into account inflation, taxes, investment fees and possible interest earned over the years. It is though a good rough estimate.
The interesting thing is once your reach your wealthy number, this is the time you can start to increase your lifestyle expenses with little fear. Everything after this becomes gravy. What do I mean by this? I mean if you gain say an additional $100,000 in savings, yet your expenses are still the same, you can in theory buy a $100k automobile. After all, you have enough money saved to cover existing expenses.
A one time expense certainly will not affect your bottom line. OK, I’m being slightly simplistic because other expensive items will come with the car (auto repair, insurance, maintance, fuel, etc), but you get the idea. You do have to be cautious of recurring monthl,y or annual expenses that can make you poor very quickly. Let’s say you buy a vacation home, unless you rent it out during the time you’re not there, it can be a costly expense that will add to your annual expenses. If you lose your wealthy status because of some luxury purchase, don’t do it.
Readers: What do you think of my definition of wealthy? How wealthy are you? How many months (or years) can you last with your existing savings?
Savings divided by annual expenses is a pretty good way to estimate it. My number is currently somewhere between 35 and 40 years of savings which when invested will last forever. Of course I need far less to live on than you guys do, hence my high number. I am 34 years old.
Yup, you are considered wealthy. Congrats! Now if I could get you to increase your income for some luxury items
No income is needed to own items. Only to buy them. Once you have them, you don't need to earn more.
(Unless it's high maintenance items — stay away from those.)
Well that's not completely true. Let me use the finishing of my basement as an example. We finished the basement which cost $30k, but also had to buy a new TV ($4k) and couch ($2k). Another example is my wife just purchased an iPhone. So with the iPhone she'll need to purchase a case, she'll more than likely buy apps and so on and so on. There is a term for this, but the name of it escapes me at the moment.
"We finished the basement which cost $30k, but also had to buy a new TV ($4k) and couch ($2k). Another example is my wife just purchased an iPhone. So with the iPhone she'll need to purchase a case, she'll more than likely buy apps and so on and so on. There is a term for this, but the name of it escapes me at the moment. "
Would the name be 'flagrant consumerism', by any chance? My version of wealthy includes not frittering it away on nonsense buys like this, but each to his own
I meant economic term that economists call it.
I like your definition of wealthy, but I think it is too narrow. I associate the word wealthy with freedom! So maybe add the word liquid to your definition?
I have no where near where I want to be! So nope not wealthy
You have a good point about being liquid, though in most cases your savings would not be generating any income.
For example I no longer have emergency savings. I feel it's silly to have and want to make a blog post about this. As long as I can cash out of my investments in an orderly fashion and over a long time frame (say a few years) then why put all of it earning next to nothing? IMHO credit cards and some semi-liquid investments (ie short term bond fund) can be used.
Junkie, wealthy means never having to work anymore and having enough cash such that you can draw from it forever without taking any risk (e.g., 100% treasury bonds). Or, you are have so much cash that your full time job is to give money away because you can't spend it.
Merely well off future retirees (like me for now), can expect to live comfortably without working but with a need to take market risk either through dividends, real estate investments, etc.
Mike
“you can draw from it forever without taking any risk (e.g., 100% treasury bonds).”
You assume treasury bonds are 100% risk free. They are not. All investments have risk including things people consider “risk free”. Sometimes the risks are not as obvious or well defined.
Treasury bonds have inflation risk (even TIPS). Sure you’ll get your money back (assuming the govt does not default), but in terms of real dollars after inflation are you making money or losing it?
Good definition strictly from a monetary point of view. I agree.
Pretty straight forward and simple.