It’s time to get a bit real. I’ve written in the past about defining wealthy. But today I want to write about what it means to be rich.
If you recall from my piece about wealth, wealth is as much a state of mind as it is a number. But wealth does not mean rich. Rich in my mind is measured solely by a number. But what is that number?
I grew up as a lower-middle-class household. My mother was a nurse and my father was at times employed as a truck driver. When I was young we lived fairly paycheck to paycheck, though some of that was due to my parent’s financial habits. That colored my perspective of what I viewed as rich as a kid.
My View of Rich as a Kid
So what did I think was rich? In general a doctor, a lawyer, or maybe even an engineer. The concept of making 6 figures back in the early 90s seemed like something I would define as rich. My goal when I was 18, which I remember well, was to have an income of 6 figures by the time I was 30. As if this was the pinnacle of financial success. Reach for the sky I tell you (said a bit tongue in cheek).
Income Versus Net Worth When Determining Rich
You’ll note the focus here was about income. I’d yet to come to the realization that rich wasn’t really an income measure. Income can come and go. Rich meanwhile is really a net worth measurement. Even if I made 1 Million dollars one year, if I had nothing left the next and was unemployed I wouldn’t be rich.
Think about the concept of net worth versus income this way. Imagine a hypothetical person named John. John made a million dollars his first year out of college playing professional sports. But during his first year, he was injured and can never work again. Meanwhile another person, Mary makes 100K a year reliably. There is obviously a point where Mary is more rich than John, if John never makes another dime.
Sustainability Defines Rich
An extreme example I know. But the point is, a non-sustainable income is not rich. Rich is something that generally lasts some period of time. Now it could be that a person like a doctor or a lawyer makes a sustainable 500K a year, but it also could be the retire who makes no income at all but has 10 Million in the bank. Sustainable can be achieved by either a stable income or net worth.
Only Net Worth is Truly Sustainable
The thing is, only net worth is truly guaranteed from year to year. No income is guaranteed stable. Like John, any one of us could get injured or have some other issue come up that could end our income. If nothing is saved, then that person would no longer be rich, potentially in the blink of an eye. So, in essence, a net worth position is the most reliable way to measure who is rich and will remain there regardless of economic ups or downs.
That is interesting to think about because our whole society is built around the concept that income defines you as rich. Taxes, government benefits, and even discounts on health insurance are all built around income limits. But just because you have a high income for a single year does not make you rich. Nor does having a low income make you not rich. Anyway, I digress.
Time and Sustainability
You’ll note I also didn’t define the time period we are talking about as sustainable. I do feel to be rich you required a sustainable position for more than a year or 2. But people can and do fall out of being rich over their lifetimes. So while net worth is one of the key measurements of being rich, it’s still not a sustained guarantee depending on what someone does with those assets. As William Bernstein is oft-quoted as saying, “When you’ve won the game, quit playing..”. In essence, the maintenance of wealth, at least in one’s own lifetime, often requires one to know when to quit when you are ahead. If you invest your fortune in say bitcoin and it goes to 0 in a few years, well I guess you were rich.. You just may not stay as such.
Liquidity Versus Assets: Cash Flow is King
Along those lines, not all money is created equal when talking about being rich. You can have a huge net worth but no cash flow. Take someone working for a startup in Silicon Valley. They might have stock options in the multi-millions. But they also might not be able to sell them for a long time. So are they rich now? Probably not. After all their startup may crash long before they cash out. Similarly, any kind of investment driving a high net worth that is not liquid probably shouldn’t count as being rich until it is liquid. Don’t count your chickens before they hatch so to speak.
Rich is Relative
So far I’ve focused on measuring rich but I kind of ignored the number that defines rich. I hinted at it in the beginning though. You see, rich is a relative number! People tend to judge their position in life-based on comparison. So compared to my life as a kid, the guy with a million in the bank and a 100K job was rich. Moving up the charts compared to my position now that person is not rich. These days when I think rich the pictures running in my mind are private jets, a Rolls Royce, and a massive house. It’s relative to where I sit on the scale.
People Rarely See Themselves as Rich
Studies actually back up this position. One survey not that long ago found that 68% of people in the US believe they are middle-class. Now the obvious fact that the simple definition of middle eliminates any way that 2/3 of society could be middle class needs no pointing out. But yet huge swaths of society don’t think of themselves as well-off, yet I’m sure if you asked some of the people on the lower end they would label those at the upper end as such.
Conspicuous Consumption and the 1%
Now, my current vision of rich jives heavily with conspicuous consumption, mainly because that is how the media portrays affluent people. Spending in ways that the rest of us couldn’t contemplate. Basically, I’m bombarded with shows and Instagram that picture the uber-rich as living an endless life of decadence and debauchery. And many do. But just like any other cross-section of society, some don’t. If you had 100 million in the bank it wouldn’t matter if you drove a Honda Civic or a Ferrari, I’d still think you were rich. It doesn’t really matter how you choose to spend it in my mind, as that is a factor of what you value not your money. I myself espouse stealth wealth, and know I’m not alone. So I will go on record as saying there are more than a few people I would consider rich that I would not recognize on the street as such.
I Do Not Wish To Be Rich As I Define It Today
Now, this piece raises one final question. When I was young I strived to be what I considered rich. The engineer, the doctor, the 100K a year employee. Do I still strive to be rich based on my definition today? No…
Unlikely To Become the 1% Working For Someone Else
Let me level with you. As a corporate employee, it is unlikely you will ever reach that 100 Million dollar level I mentioned. Perhaps if your CEO of some Megacorp. But there can only be one CEO per megacorp and there might be 700 of those in existence. So, frankly, the chances of me making it to a corporate executive are about 0. Most of us including myself are probably more likely statistically to win the lottery.
No the way you make it to 100 million dollars is to start your own business. Then be one of the lucky few that really hit that million-dollar idea. Given less than half of businesses survive 5 years, the odds are also low here. But they are somewhat better than the corporate route. It’s important to note making a business worth 100 million is a heavy lift. Long hours away from family and friends are necessary to truly make it to that level.
Being Rich May Not Be Worth the Climb
The thing is, I don’t need or really want 100 million dollars. I already meet my definition of wealthy and I am not far off that definition being sustainable with or without employment (the concept of financially independence really). The hill is not worth the climb to make it to the next level of funds. To do so I’d have to sacrifice too much of what makes me happy and wealthy in those long hours. That seems counter-productive when a number is not really the goal. My goal is to stay happy and wealthy.
Being Rich is Not the Goal, Being Wealthy Is
So I guess really my point of this winding post is that the goal shouldn’t really be to become rich. It should be to become and stay wealthy. After all, happiness is the goal, not some number on a sheet of paper.
What number do you define as rich?