Personal Development

Defining True Wealth: Which of These Six Levels Describes You?

Expertise: Personal Development, Real Estate Investing Basics
23 Articles Written
Levels of Wealth

I know a lot of really wealthy people. A consistent comment I hear from them about their wealth is that they have it, but they’re not sure when they got it. I love that comment – it always makes me laugh!

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Now, don’t get me wrong, they absolutely know HOW they got there – years of hard work and personal sacrifice. It’s just that they don’t know exactly when that tipping point from need to excess happened, when they actually became wealthy.

My question to you is, are you there? Sorta there? Would you recognize it if you were?

At a recent Tony Robbins event, we were given a way to measure financial progress. I’d like to share that here so you can watch for your own tipping point with some numerics and definitions, as well as with great anticipation!

Did you know there are areas of wealth to be measured? Fortunately, there are. And if we can break them down and analyze them, we can track our progress. Like any area of pursuit, if you don’t have a map, you don’t know how to get where you want to end up and you won’t know if/when you arrive.

Let’s clarify what that road to true wealth looks like.

Related: BP Radio Podcast 002: Starting Out with Karen Rittenhouse – Subject To, Direct Mail, and Investing from a Woman’s Perspective

1. Financial Protection

This is the starting point, the first goal. In this stage:

  • You have enough liquid assets to cover your overhead, your basic living expenses, for a minimum 2-24 months (depending upon your level of comfort). You have enough liquidity (savings) to meet the basic needs of your family whether or not you’re able to work.
  • You have begun a life insurance fund that will protect your family if you’re gone.
  • Depending how much you have saved, you have enough disability insurance to cover any unforeseen circumstance.

2. Financial Security

You have created enough critical mass of capital to generate the necessary cash to meet the following needs without ever having to work again:

  • monthly mortgage payment
  • monthly food bill
  • all utilities
  • all transportation needs
  • insurance
  • taxes

Have you calculated that number? Do you know your true costs to live each and every month? Sit down and write out all basic monthly expenses that must be covered for you and your family to live.

That number is your financial security number. When that amount is coming in every month from investment returns, you no longer have to work to meet your family’s basic monthly expenses and you are financially secure.

3. Financial Vitality

You have met your Financial Security goals, plus you have enough excess capital coming in every month from investment returns to additionally cover:

  • your children’s education (this may be a good time to work toward scholarships!)
  • entertainment needs (start with a goal to cover half of what you currently spend)
  • new clothing and some “luxury” items

Financial vitality is the ability to financially cover all of your needs and some of your wants without ever having to work again.

4. Financial Independence

You have enough excess capital coming in every month off your investments that, without ever working again, you are able to maintain the exact same quality of life that you already enjoy.

5. Financial Freedom

You’ve accumulated enough critical mass with your investments to provide sufficient income to live the lifestyle you desire without ever having to work again for the rest of your life.

6. Absolute Financial Freedom

You can do whatever you want, whenever you want, wherever you want, for as long as you want, forever.

Naturally, when you’ve arrived at any of these levels, you can continue to work if you want to; the point is simply that you don’t need to work to pay the bills. Sweet!

And, always take into account inflation. That’s one of the many great things about real estate investing – if set up properly, it should take care of inflation as both property values and rents historically increase over time.

Breaking down these levels into understandable chunks was a huge relief for me. Instead of waiting to get to that ever elusive (and ever moving) goal of “wealth”, I can now look at this list and chart our growth and progress.

How about you – where are you on the list? I hope this helps.

Photo: papalars

Karen Rittenhouse has been investing in real estate full time since January 2005. In that time, she has purchased hundreds of single family properties, opened a full-service real estate company, a property management company, a coaching/training business, and written three books on real estate.

    Douglas Dowell
    Replied almost 6 years ago
    Outstanding read Karen, I think this ladder is an excellent break down of the rungs that should be climbed. If your risk seeker like me its more like monkey bars and swinging a rung higher is always been my mentality. Its not for everyone for sure because when you fall its kinda ouchy.
    Karen Rittenhouse
    Replied almost 6 years ago
    Thanks, Douglas! When you securely land on each rung, there should be far less risk of falling. Wishing you great success on your climb!
    Douglas Dowell
    Replied almost 6 years ago
    I feel so strongly I posted twice twice hahaha I think understanding your risk tolerance and the corresponding flaw that comes with it is really important. Risk Seekers and Risk Adverse each lose something with their profile. It takes all kinds. For sure. I think being able to step out of myself for a bit and wear a different hat is something that Tony and other great teachers advocate. Thank you for the best wishes and as always if I may be of help to your success in any way please let me know.
    Mark Ferguson
    Replied almost 6 years ago
    great article Karen, Way to make people think! I would say I am around a two, but it is hard to figure. I have enough coming in off my rentals for basic costs, but nothing extra. Most of my income is from other sources, not work I actually do, but I manage those sources. Some of it would continue without me and some would not. Depending on what the definition of not working is would change between two and three.
    Karen Rittenhouse
    Replied almost 6 years ago
    Well, Mark, imagine you’re gone. Will that wealth continue to come in for your family? Best to you on your way to Six! Reply Report comment
    Karen Rittenhouse
    Replied almost 6 years ago
    Well, Mark, imagine you’re gone. Will that wealth continue to come in for your family? Best to you on your way to Six!
    Karen
    Replied almost 6 years ago
    Nice article, Karen. We have an emergency fund and some insurance and I’m learning more about income investing to get started. I like how you have broken it down into chunks, enough to cover food, etc., because those ate nice, achievable targets. Like the cashflow game, it gets you focused on the independence goal. Thanks for sharing!
    Karen Rittenhouse
    Replied almost 6 years ago
    It’s a great system to focus on, Karen, to keep you moving toward your ultimate target and to let you see the progress you’ve made. So glad to know you’re working on your financial protection. Peace of mind is a wonderful thing!
    Kyle Hipp
    Replied almost 6 years ago
    I had started my real estate investing before I met my wife. Once we met I found I focused a lot better on it and grown a lot. This is the type of stuff we talk about in our investing. I still work, we are married and have a 2 year old son and my wife is a stay at home mom. When we plow our money and time into our real estate between improvements or purchases, I always equate the return to our finacial status as described here. If we do this deal, we will have all our needs covered even if I lose my job. If we do this next deal, we are able to watch something on the tv by having cable and keep our fancy phone plans as well. It breaks it down nice and we can see where our money and more importantly our time is going towards. Great article 😉
    Karen Rittenhouse
    Replied almost 6 years ago
    Congratulations, Kyle, on the way you look at your investing. Perfect. I always tell people to start small – just focus on generating enough each month to cover your cable bill, then your car payment, then your mortgage. One step at a time ’til you find yourself at the top of the ladder! Thanks for leaving a comment.
    Jon Kepler
    Replied almost 6 years ago
    To be completely honest, I disagree with much of this article. It makes the assumption that you need to deleverage yourself in order to be rich. Some people are forced to keep working because their mortgage payment is $40,000/month.They are still wealthy. I once read about someone who had $120,000/month in net income. They bought a bigger house with a $60,000/month mortgage payment. They were fine with it — they felt that the remaining 50% of their income was enough to cover living expenses and personal savings. Even if you don’t agree with this person’s opinion on debt, it’s hard to argue that they’re not rich.
    Juls
    Replied almost 6 years ago
    Wealth is not about what you spend, it is about what you keep. Wealth is freedom to choose and not to be burdened.
    Karen Rittenhouse
    Replied almost 6 years ago
    Absolutely, Juls. The wealthy have much better choices in life (like whether or not to get up and go to work!) than those who aren’t. Thanks for commenting.
    Jon Kepler
    Replied almost 6 years ago
    Juls, you’re half right. Wealth is the freedom to choose, and some *choose* to be “burdened”. Also, be careful with the “spend vs. keep” logic. When I “spend” money paying down my mortgage principal every month, I’m simultaneously keeping it as well.
    Karen Rittenhouse
    Replied almost 6 years ago
    Hi Jon, HUGE difference between being financially rich and being financially wealthy. There are lots of “get rich quick” schemes – haven’t seen a “get wealthy quick” one. I read somewhere a saying that, “rich is waking up at 4am to take the train into the city and make millions on Wall Street. Wealthy is waking up without an alarm clock.” The wealthy don’t worry about working (unless they want to). Thanks for your comment.
    Jon Kepler
    Replied almost 6 years ago
    Thanks for replying, Karen. I don’t want to be a “troll”, so I wasn’t going to comment further. However, I believe that the rich vs. wealthy comparison is dated. It’s not that simple. In terms of your six steps, the first four make sense. #5 is really tough. I know of people worth tens of millions of dollars who use private jets most of the time, but not all the time. They still aren’t rich enough to give up public air travel for good. #6 is practically impossible. When you get your first Rolls Royce, you want another. You’re never really done. The concept of “whatever you want, whenever you want” is a myth. Are you familiar with Donald Trump’s Mar-a-Lago club in Florida? Have you ever wondered why it’s a club? Donald wanted to keep it as his private residence, but he couldn’t afford it. #6 doesn’t exist—everyone has limits.
    George Paiva
    Replied almost 6 years ago
    This blog reminds me of “The Millionaire Next Door” where they discuss where your wealth should be. Expected Net Worth = Age * Annual Income / 10. They also stress its all of what you keep not what you spend.
    Karen Rittenhouse
    Replied almost 6 years ago
    Hi George: I’d not heard that formula. Did you state it correctly? I tried it and it wasn’t accurate for me. Also haven’t read “the Millionaire Next Door” but have certainly heard about it. Would you recommend it? Thanks for keeping the conversation going.
    Ray Jackson
    Replied almost 6 years ago
    Thanks for the article, it breaks things down in a very useful and understandable way. I have already forwarded it to some family members.
    Karen Rittenhouse
    Replied almost 6 years ago
    Great, Ray! I’m so glad you found it helpful. Thanks for letting me know. 🙂
    Ben Leybovich
    Replied almost 6 years ago
    I want money, lots and lots of money, la la la la la la laaaaaaaa Passive C.F of $15k / month ought to get me to step 4.5 – working on it and BP will be the first to know… Interestingly, this CF game unfolds in waves. The first $200.month is really hard, but then you breeze to $1,500 with relative ease. Then, the next $2,000 is really tough to cause it requires you to think differently. From there, 2 big deals git r done – working on it right now 🙂 Really good read Karen!
    Karen Rittenhouse
    Replied almost 6 years ago
    I want wealth, lots and lots of wealth, la la la la laaaaaaaa 🙂 You’re so right about cash flow unfolding in waves. Finally, you reach that tipping point where you’re over the top – forever. Lots of bobbing and weaving until then! Thanks, Ben, for commenting.
    Karen Rittenhouse
    Replied almost 6 years ago
    I want wealth, lots and lots of wealth, la la la la laaaaaaaa 🙂 You’re so right about cash flow unfolding in waves. Finally, you reach that tipping point where you’re over the top – forever. Lots of bobbing and weaving until then! Thanks, Ben, for commenting. Reply Report comment
    Karen Rittenhouse
    Replied almost 6 years ago
    I want wealth, lots and lots of wealth, la la la la laaaaaaaa 🙂 You’re so right about cash flow unfolding in waves. Finally, you reach that tipping point where you’re over the top – forever. Lots of bobbing and weaving until then! Thanks, Ben, for commenting.
    Kyle Hipp
    Replied almost 6 years ago
    Speaking on the wealth goals. A formula I really liked as it was quite agressive is. Age 16 – 40ish your net worth should be 0-25% of your total lifetime earnings, age 40-60 your net worth should be between 25% -100% of your lifetime income. 60+ or by your desired retirement date your net worth should equal 100% – 200% of your lifetime income. Lifetime income was determined by your social security statement, what showed on that. It shows that you need assets and growth in order to have a net worth larger than the money you have made from an employer. Just another one to look at that is interesting.
    Karen Rittenhouse
    Replied almost 6 years ago
    That’s fabulous, Kyle! Thanks for sharing it. And thank goodness my net worth is well beyond my lifetime income. 🙂
    Sharon Vornholt
    Replied almost 6 years ago
    Nice post Karen. These are all things everyone needs to think about. You can’t reach your financial goals, if you haven’t taken the time to set define your goals. It’s an exercise people put off way too long. Sharon
    Karen Rittenhouse
    Replied almost 6 years ago
    You’re right, Sharon. And thanks so much for commenting.
    Karen Rittenhouse
    Replied almost 6 years ago
    You’re right, Sharon. And thanks so much for commenting.
    Michael
    Replied almost 6 years ago
    Never looked at that way Karen but It got me thinking more about the different levels you laid out. Now I have to acquire and flip more properties thanks to you. LOL.
    Michael
    Replied almost 6 years ago
    Never looked at that way Karen but It got me thinking more about the different levels you laid out. Now I have to acquire and flip more properties thanks to you. LOL.
    Karen Rittenhouse
    Replied almost 6 years ago
    Hey, Michael: Glad to know I’m helping push you up the hill… 🙂
    Karen Rittenhouse
    Replied almost 6 years ago
    Hey, Michael: Glad to know I’m helping push you up the hill… 🙂
    Karen Rittenhouse
    Replied almost 6 years ago
    Hey, Michael: Glad to know I’m helping push you up the hill… 🙂 Reply Report comment
    Jeff S
    Replied almost 6 years ago
    There is a stage where you can sell your places on contract and replace your job which comes before (2, 3, or 4?) having investments fill in all the gaps. This can be an easy one if you hit the upward wave just right. Plus if you are close to retirement age-30 yrs of pymts goes a long ways.
    Karen Rittenhouse
    Replied almost 6 years ago
    Thanks, Jeff, for adding to the conversation! Reply Report comment
    Karen Rittenhouse
    Replied almost 6 years ago
    Thanks, Jeff, for adding to the conversation!
    Keith Weinhold
    Replied almost 6 years ago
    Karen, I love it! I’ve never seen a column quite like yours in either real estate or other investing informational platforms. It gives us all something to aspire to. It makes me think more about NOI enhancements to my multifamily buildings. Thank you!
    Karen Rittenhouse
    Replied almost 6 years ago
    Great, Keith, glad you liked it! Here’s wishing you tremendous success!
    Shaun
    Replied almost 6 years ago
    Yikes when you look at it this way you might not be doing as well as you thought! 🙂 I think it takes a while to get past those first few stages and really ramp up. I know my mix of active and passive strategies is paying off, but I can’t stop my active flipping at this point and be free, or even have vitality, with my passive investments yet. Good goals to have and a great way to measure progress. Thanks for the good read!
    Karen Rittenhouse
    Replied almost 6 years ago
    Shaun: We all need ways to measure our progress, and I’m glad you found this helpful. Thanks for taking the time to comment. Reply Report comment
    Karen Rittenhouse
    Replied almost 6 years ago
    Shaun: We all need ways to measure our progress, and I’m glad you found this helpful. Thanks for taking the time to comment.
    Tiffany Mitchell from Orlando, Florida
    Replied almost 4 years ago
    This was such a great article, thanks for sharing, I definitely took notes and put the info into a word document so I can keep track of my process, because I’m definitely trying to make it to Absolute Financial Freedom for sure!!!