Monday, April 20, 2009

What Does It Mean To Be Wealthy?

What does it mean to be wealthy? There truly is a large amount of ambiguity when people talk about wealth. It seems as if every person has their own conception of what wealth is. Some people might view wealth as having an abundance of material possessions while another person might view wealth as being mentally, physically, and spiritually healthy. Some people might think wealth is having one million dollars in the bank while another person might not feel wealthy unless they have ten million dollars or more in the bank.

The Merriam-Webster dictionary defines wealth as: all property that has a money value or an exchangeable value. Sure, that is a general qualification of wealth, but what truly quantifies wealth?

Here is how I define how much money it takes to be first rich then wealthy. First, to consider yourself rich you simply have enough money that would allow you to live your current lifestyle without having to earn any additional income for ten years. That amount also has to cover inflation. Second, to consider yourself wealthy it is the same concept, but extend it for twenty years.

So, lets say you need $50K per year "after taxes" to live your current lifestyle. To be considered rich in practical terms you would need to have $590K in savings. To be considered wealthy, you would have to have $1.4M. Those figures are simply reached by compounding 3% for inflation.

I find this gauge of net worth analysis to be one of the most objective for individuals. In most cases, it will determine that people who don't earn lofty salaries, but live below their means have a higher relative net worth than those who are high earners, yet poor savers.

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