In recent times there has been discussion of the 1% vs. the 99%. Strangely enough, in order to be in the top 5% of net worth you have to have $1.5 million in net worth including your home. The question is does a large net worth make you “wealthy?”
Perhaps the best explanation that I have run across on what wealth means is that it is how long you could live given your current lifestyle, net worth, and investment income without working another day.
What sort of lifestyle are you living? If you need $300,000/year to live and have a net worth or $1.5 million, you are certainly wealthier than most. I would argue that you are not necessarily wealthy.
You would most likely have a little over 5 years-worth of wealth. That is to say you could live your current lifestyle for a little over 5 years (I am assuming at least some of it produces income) without working.
Now, what if we to have a true makeover and you were to cut your expenses down to $40K-50K per year and most likely live in a more modest home? All of a sudden, I would probably say that you are wealthy. Chances are you could live the rest of your life without working.
For those of us who are the 95%, I have several pieces of good news. One of the first is that you do not need to be in the 5% of net worth to enjoy life and enjoy it responsibly. For example, let us say that you own your own home. And you have $3,000/month in expenses as a couple. Let us also say that as a couple you bring in $2,000/month in social security. It is altogether possible with $300,000 in investments you could live a very comfortable retirement. The second is that you can usually make changes to adjust your lifestyle which can increase your wealth. The third is that it is never too late to increase wealth.
Wealth is a function not only of net worth/income producing assets; it is a function of our expenses as well. It is altogether possible that a man who owns a car wash and lives a modest lifestyle can be wealthier than celebrities who make millions, but spend it as fast as they make it.
On the other hand, if you increase your expenses, it is easy to lose wealth as well.
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