Without looking online, how would you define wealth?
We all have a general idea of what wealth is, but I’ll bet that if you were to ask the average person on the street their definition would come close to Webster’s:
Wealth: abundance of valuable material possessions or resources.
It’s not that easy.
I’m going to say that if you were to ask me five or six years ago I might have agreed. Now though, I’m not so sure. To me, possessions just means stuff. So would a person who drives a $150,000 car and lives in a million dollar house on the water be considered wealthy? What if they were in debt to the tune of 1.5 million dollars and had a negative value? They’d still have an “abundance of material possessions”, but to me they’d seem to be in a pretty precarious position.
Definition from The Millionaire Next Door
Thomas J. Stanley, Ph.D and William D. Danko, Ph.D made me question the original definition of wealth in The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
The basic premise of wealth in The Millionaire Next Door is that wealth is based on age, income, and the net worth of your appreciable assets minus any inheritance. I’m guessing that you want to know if you’d be considered wealthy by these terms. Well it’s not too hard, just:
- Take your annual pre-tax household income, minus any inheritance and multiply it by your age.
- Divide that number by 10.
- Subtract any inherited wealth. The number remaining is the amount of money your net worth should be without any inheritance.
To put this definition into perspective let’s take Richard and Bill.
Richard is 60 and earns a very nice salary of $500,000 per year. However, even with such a nice income, Richard tends to spend it faster than it can come in. Still, he’s managed to accumulate a net worth of $1.2 million. Not bad right? Well, not so fast. See, according to The Millionaire Next Door, Richard should have a net worth of at least $3 million to be considered wealthy.
Bill’s financial situation is much different from Richard’s. Bill is 35 and makes $45,000. Bill has managed to save $200,000 without ever inheriting a dime. I wouldn’t mind having a net worth of $200,000 at 35, but that can’t really be considered wealthy right? Bill hasn’t even reached the million dollar mark. However, based on his income and age, Bill is considered to be wealthy. He’s actually quite a bit ahead of the game because his wealth number would be $157,500.
Wealth is Relative
According to the traditional definition of wealth, Richard would be quite a bit wealthier than Bill. But I think that the definition presented in The Millionaire Next Door paints a much clearer picture of what true wealth really is. If both men were to lose their jobs tomorrow, Bill’s wealth would be able to carry him much longer than Richard’s would.
Bill’s net worth is actually a tad bit over four times his annual income. Whereas Richard’s is just a bit over twice as much. If you add in the fact that Richard is twice Bill’s age, then you can see that Bill actually could live longer than four years, because he saves so much income and lives under his means. Richard on the other hand spends a large portion of his income which is shown by the fact that his net worth is much lower.
How would I define Wealth?
My current views on wealth was actually formed a few years ago when I watched an episode of the Cosby Show. One of the girls was getting picked on at school because her family had money. Her father is a physician and mother is a lawyer, so why not. Anyways, she ran to her mother to explain what was bothering her. Her mother said that they were not wealthy. She said you’re wealthy when your money starts to make more than you do. I liked that definition of wealth and it stuck with me, because once you’ve hit that point you have pretty much achieved financial independence.
How do you define wealth? Do you agree or disagree with any of these definitions?
“Some people are so poor, all they have is money.” How’s that for relative? But I like that quote somehow. And I like your definition of wealthy too.
I really like your quote. It puts things into perspective that wealth is more than just money. It’s also happiness, relationships, health ect..
What an interesting way of looking at net worth. I think as a standard definition, there’s no two ways about it, wealth is about the money and possessions you own. Once you start adding context to it such as inheritance, age and happiness it becomes something else, it becomes a discourse.
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Jamie, I didn’t really think of it that way. I suppose once you add “extras” to it, it does become something completely different. Like an entire new philosophy.
I absolutely loved The Millionaire Next Door. It also changed my opinion about “wealth” really is and how it can’t be measured by your possessions. The concept of wealth is something we deal with regularly on MMD. To me, it simply means the point at which your money generating assets can now take care of your cash flow (i.e. you no longer have to work if you want to) enough to cover your monthly expenses. That is the place I’m trying to get to!
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I’m with your MMD. Your definition is exactly how I interpreted the Cosby Show’s version.
Wealth is Relative – SO TRUE!
If I was to go back and tell 10 or 15 year old me how much I had in assets now I would think I was rich and probably didn’t need to work.
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That’s true. Back in the day I would have thought our gross income was pretty good. Now that we want to move up in the financial world, we’re trying to expand it so we can increase our savings.
I heard someone once say that to be rich is to “have more than you need”. Although I don’t think that is the best definition, it made me appreciate how much we have that much more. There is a website called Global Rich List, and if you put in your income in will tell you how wealthy you are compared to the rest of the world. If you make $50,000 a year, you are in the top 1% of the world. It definitely makes you think.
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That’s a good point Deacon. It’s amazing how your view changes based upon local. For example, even a millionaire may feel poor when standing in an extravagant party at some billionaire house.
But people who are considered “poor” in America, are really rich when you look at the bigger picture. It’s a sign when our low income people are more likely to be obese than starve.
I love the definition at the bottom of your piece and always try to remind myself of this whenever I’m investing. It helps me stay aggressive to know that I’m building a pot of money that can take over my work.
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Once we’re retired, it’s the main source of our income. So I suppose we should all want to become wealthy. If only to keep from eating Alpo.
Comparing the Webster’s definition to yours Justin, I would definitely have to go with yours. Having more stuff is just that, more stuff. Is does not take wealth to buy expensive things, after all, you just need access to a nice credit card to buy something valuable.
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Thanks John. But to defend Webster’s credit, I’m guessing it was written before televisions, luxury cars and other garbage items. Furniture and other forms of property tended to hold their value. So having possessions that you could sell/trade would be part of your wealth. Now though, half the stuff bought in this country ends up in a landfill way too soon.
The age old question. I am not sure how I would define wealthy, but I like how it was portrayed on the Cosby Show. If your money is making more money for you than you earn, then you have done it right and you are wealthy.
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I think that’s why that scene in the Cosby Show stuck with me. Because it was one of those uh-hu moments.
Following up on KC’s comment, I’d like to broaden the definition of wealth to incorporate measures of the quality of one’s circle of friends, the strength of family relationships, and one’s power to do good in the community.
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Good point Kurt. You can have all of the money in the world, but how happy would you be without loved ones. There is a certain balance that we all must reach.
I used to work with a salesman in the IT Industry. IT sales can be extremely lucrative, annual incomes well in excess of 200k being the norm. This particular guy would not drive a car worth less than 100k, built a 9000 square foot home in Northeastern NJ and basically lived refinanced that home every two years or so (this was before the bust) to finance his cars and come up with cash to pay his mortgage. He eventually had that house mortgaged for 6 MILLION Dollars!!!! He had a grand plan to eventually sell it and cash a few million out to live a “normal” life. I haven’t been in touch with him in years so am not sure how he made it through the bust but that’s not the point I’m making here. My point is that I had little respect for this man and never considered him wealthy (I looked at him as a financial time bomb), I actually considered him to be poor in the things that count in life. A guy like this will never be happy with what he has and will always be stretching for the next station in life (or more likely than not financing his way towards it). I should probably do an article on him, it would be an amusing read at best
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I would say that your co-worker played the system more than anything. He’s trying the easy way out. When we try these types of schemes, it usually makes for a hard landing.
I define wealth by a very simple measure, does your passive income cover your monthly expenses. Depending how many times your passive income covers your expenses determines how wealthy you are. Great article! Too many people this day in age confuse rich with wealthy.
Brick By Brick Investing | Marvin recently posted..Intel Trade Part 2
Good point Marvin. That goes along with the Cosby Show definition.
Hmmm…interesting question. Wealth means very different things to people. Webster’s definition is one that a lot of people would probably agree with but when I think of wealth – it’s less about the all the stuff I can buy but more about how can I use it in alignment with my goals and values. They may sound the same but I see a lot of people spending for spending’s sake without any thought. I spend deliberately on things that matter most to me. I don’t necessarily consider the more money a person has the wealthier they are. To me the wealthiest person is the one who uses whatever amount of money they have – great or small – to live a happy life within their means and on what they love most.
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I like the way you think Shannon. Spending for the sake of spending drives me up a tree.
“When your money makes more than you do” – that’s a great definition. I guess it really just depends on how much “enough” is.
That is true. What’s enough for you and me may be completely different from someone who has several billion dollars and rising.
Hi Justin,
This is a remarkable post. There are different beliefs about the concept of wealth. However, wealth is truly relative. Wealth is not all about material things. Wealth is also strength of character and accumulation of talents and experiences.
Thanks David, that’s a great list. I would also add the love of those around you. All the wealth in the world won’t do much if you’re alone.
I think that is true and a great way of looking at things. It’s all relative and you never know what is going on behind closed doors.
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Yes. Sometimes I wonder what exactly certain people’s finances look like. But then I remember not to throw stones in glass houses.
Wealth to me is having enough money not to worry but also having the happiness to enjoy it. If you are working 100 hours a week to afford your “wealth”, that isn’t really wealthy in my book.
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Good point Kim. You can be wealthy, but never be able to truly enjoy it because you’re always trying to increase your wealth.