Saw this article on MSN Money today: The answer to this question will tell you if you're wealthy. --------------------------------------------------------------------------------------------- Excerpt from the article: To qualify as upper class in the U.S., a family of four needs to earn an annual income of at least $144,251. To place in the top 1 percent of Americans, they would need to bring in at least $389,436. But do either of these comparative distinctions make you wealthy? It depends on how you define wealth. For Derek Sall, a personal finance blogger and financial analyst who paid off $116,000 in seven years, it's not about how much money you bring in each month but how much you're able to save. He says you need to ask yourself only one simple question to determine whether you're wealthy: If you lost your job tomorrow, how long could you survive? It's easy to judge wealth as a function of what you own, but as Sall points out, material possessions mean nothing about the real state of your finances. "Heck, you could drive a $40,000 BMW and live in a $500,000 home, but if you're $600,000 in debt, then you're actually worth less than a 7-year-old child," he writes. To answer his own question, Sall developed a scale for quantifying wealth. Here's how well off you are depending on how long you could last without a source of income: • Less than a month: Broke • One to three months: Teetering • Three to six months: Satisfactory • Six months to two years: Well off • Two to five years: Wealthy • Five or more years: Ultra-wealthy --------------------------------------------------------------------------------------------- The author makes some good points. Often times people are presumed to be wealthy because they live in a big house or drive a fancy car, but I would argue that alone usually doesn't tell you how well the person is really doing financially. In fact, I've personally known people who live in a big house and drive a nice car and they wouldn't be able to pay their bills for a single month if their income suddenly stopped. The one thing I would probably disagree with the author on is what seems like his interchangeable use of the questions "How long could you last if you lost your job" and "How long could you last without a source of income". I'm sure to most of us on BP, these mean different things. For example, if you lost your job tomorrow but still had your passive income from rentals, you may be able to survive much longer - perhaps indefinitely. The point is, a job is just one source of income, not the only source. (Or at least it shouldn't be.) I'm curious what others interested in personal finance think about the author's definition of wealthy? How about you Scott Trench....would being able to survive for five or more years without a job be considered Set for Life?

We on BiggerPockets I believe are not satisfied with these levels. Three to six months of living expenses accumulated in net worth? How is that possibly satisfactory for folks on this site that aspire to early financial freedom? Here's a first stab at a list for those of us that aspire to be competent and confident in the realm of personal finance: • Less than a month: Emergency - one bad day from homelessness • One to three months: Urgent - a moderate amount of bad luck from homelessness • Three to six months: Whew - The baseline of being able to sleep soundly at night, still in all-out hustle mode • Six months to two years: Satisfactory - no longer afraid continuing to support one's self/family if job/business is lost • Two to five years: Well-off, Investments are just starting to produce meaningful amounts of supplemental income • Five or more years: Confident - Investment income may be even more than most people's salaries • 25 Years or more: Financially Independent - even with the conservative 4% Safe Withdrawal Rate • $100,000 more passive income than one spends to support their lifestyle: Wealthy • $500,000 or more in passive income above and beyond what's needed to support one's lifestyle: Ultra Wealthy Thoughts?

I think it's all perspective. I have heard that true wealth isn't measured in how many years you can live with your money but how many generations the money you have made can help others. Another way one of my friends put it... "I don't want to live off the interest my money makes... I want to live off the interest FROM the interest" I have a wife that loves me unconditionally I have two beautiful and healthy children that are very happy. EVERYTHING else is immaterial... I AM a very VERY wealthy man!

If this post proves one old adage about who is wealthy, the answer is "it depends...." Even though @Scott Trench improved the post with more levels of variation and clarity (and taking age into account), now we can find other areas left out: such as cost of living. $100,000 in Cali buys a lot less than $100K in my home town in SW Missouri. Yes, I get it that we've already covered housing because the phrase is "making $100K above living expenses (which includes housing)," but there are still other expenses that are higher. Individual taste must also be taken into account. As others have said, you can "cover" you cost of living by living very cheaply. The guy in the van down by the river vs. the guy who wants to live in Beverly Hills. The guy who takes the city bus or bicycles vs. the guy who wants a Beamer or Lambo. Wealth is a very personal thing. Some view it as purely financial numbers and balance sheets. Others view it as having the time and freedom to do what you want when you want. Others see it as having health and family. Some--like me--see it as all of the above and more. The original article shows a very high-level, unsophisticated approach to defining wealth. It's fine for a newbie to get them thinking without burying them in lots of details, but as we all know becoming wealthy and staying that way is a life-long process. I don't think most people realize that. It's why you get these insane ideas that someone "making" $144K per year is in the upper class. As compared with whom? Sam Walton's heirs? Hardly! Compared to the average paycheck to paycheck American? Definitely! Also this is why a lot of folks vote to raise taxes on "the rich" when they define anyone with an income of $200,000 per year as being rich...in SW MO (median family household income $34,000/year), that's a pretty decent income. In Cali's best neighborhoods it's barely getting by. But I digress. The question is, "Are you wealthy?" Yes, I am, by my definition. I earn considerably more money than I consume in income. I could lose my job tomorrow and be okay on investments alone. I live in a house that will be fully paid off next year, at which point we'll be debt free. I have a loving spouse, 3 wonderful kids, no health problems, a vibrant spiritual life as a Christian, a positive attitude, and we give generously to several charities that touch our lives. Would a Hollywood star agree with me? Probably not. And you know what? I really don't care what a Hollywood star thinks.

Wealth to me is measured with time. What @Mike H. mentioned. How long can you go without a paycheck, living a decent life like @JD Martin outlines? Sorry, I'm not interested in what someone makes. Tell me what you keep. After expenses, after taxes, what's left at the end of the year? A lot of us have 'til death wealth and never have to punch a time clock again thanks to RE. I like the idea of getting into next generation, changing your family tree kind of wealth as 'wealthy'. My sons having ROTHs and mutual funds and ownership in 2 apt bldgs as a teen and tween. Plans to let my grandkids someday inherit my entire ROTH and a 4-plex or two, at least. That sounds more 'wealthy' to me. $10s of millions by the time they are at retirement age in 75 years or whatever. Ultra wealthy to me is like Murdock selling 20th cent fox for $50B. He's not a real happy guy and still fights with his brother at 87, but he is 'ultra wealthy'.

Caleb is right. Age is entirely missed in the article. Is someone that is 65 and can survive 5 years Ultra-Wealthy? I would argue they are "teetering" at best! I have found that it is hard to make have financial rules and laws (as far as advice) because so much is situational. It also takes clearly defining concepts that different people could interpret differently. I think even with Scott's classifications, age matters. Also, Asset Composition really matters. Are we talking earnings or cash flow? The big thing is whether you are required to consume capital when hard times hit or are you able to consume earnings only (or ratio between the two). If an income source (Job or active vs passive) goes away how much adjustment in life style do you have to make? (If I started consuming capital instead of earnings and income, I could make it a lot longer because I would adjust my lifestyle down). Another big thing is perspective. If you are Wealthy, you might think someone that is satisfactory is broke and if you are broke you might think someone that is confident is utltra-wealthy (Thus why everything is so political these days). Personal Finance is just that....very personal.

@Mike H. your points on TRUE equity in rental property is a VERY GOOD ONE.. I know as someone who has sold off their portfolio over the last few years.. exiting rental properties in most markets is not easy and its costly. 5 to 6% sales costs... and if your going to retail them to a homeowner like I did 5 to 20k per house to get them ready to sell. If your going to sell them as cash flow the VALUE in MOST markets is purely based on rental income and backing into the 1% rule or there abouts in some markets or low value assets 2% is where you may need to price it.. so I think your correct if you think you have 20 or 25% equity because your mortgaged to the max your really only have 5 to 10% of TRUE equity if you had to convert to cash.. does not mean you might have more as mortgages paydown over the years and its nice that your tenants are paying them down.. mine I bought brand new 10 to 12 years ago and the mortgage paydown was the only reason I got any money out of them at all.. most I lost money selling by the time you pay back your positive cash flow to get the house ready to sell. I think your truly wealthy in the landlord game when your debt is far less than 50% and better yet when you have no debt. then your in the drivers seat.. you need monthly income just sell on terms.. you need cash you have ton A ROOM to move because your have 100% equity.. For me I look at paid for house to live in ( which I have ) and my and my wife's SSI here in a few years will be in the 4k a month range.. we have it made :)

But how does that account for people in their 50's with 2 million dollars in their 401k. Technically if they lost their job, they might only have 3 mos of reserves to cover it. But ultimately, they're what I would consider wealthy. In addition, most real estate investors (buy and hold anyway) would appear to be wealthy on paper but in reality they have a small percentage of the net worth that shows up on paper. Example: If you have 10 150k houses and owe 100k on each one, it looks like you are worth 500k. Sounds like you could live off that for 5 years. In reality, if you go to sell those houses, you have to figure 6 mos of vacancy, plus some make ready costs of 5 to 7k to make them retail ready, plus closing costs/realtor fees. You might be spending 20k a house to sell them. So are you really worth 500k? Or does 250k sound a little more reasonable? I equate wealth to net worth. And I equate being rich to income. I think this article is equating more to being rich and income and the replacement thereof should you lose your job. So I guess I would say you could be wealthy yet still not be rich. :-) btw: I don't know that I would think someone that could cover their living expenses for 6 mos as well off. Two years, maybe. But not six months. :-)

Are you wealthy?

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

8y

@Kyle J. wealth is by definition having an abundance of resources and possessions.

Your career is not wealth, it is an income source. If you became disabled tomorrow, you could easily stop receiving any income.

Cash flow is not wealth, it is also an income source. Cash flow is future accumulation of wealth. It is not guaranteed. If you owned 1000 acres of timber, you may feel wealthy based on future forestry. However, forest fires in my state claimed over 50,000 acres of trees this week. How about rental properties? One natural disaster or financial crisis can destroy rental income for years in a given market.

There is only one way to measure monetary wealth and that is net worth. Net worth is total assets minus total liabilities. Even your income producing assets, such as rental properties or stocks, are only measured on their present cash value.

The author of the article is making the argument that how long you can survive with no income (including no passive income) determines your level of wealth:

Net worth / average monthly expenses = number of months you can survive

This formula falls short for two reasons. First of all, average monthly expenses vary greatly depending on the individual. A homeless man sleeping on a park bench can live on $10 for years. The average person couldn't survive a day on $10. That is why you can have someone in California who makes $200K and feels poor. After housing, fancy car, gas and lifestyle, they have run that $200K down to nothing. That is why people often leave expensive states when they retire. Secondly, very rarely does all income cease. Even an unemployed person can get income through government assistance. Most of us have passive income through rentals or stock market investments. Very seldom does money sit as cash, so assuming that isn't realistic when calculating how long you can last.

Wealth is "abundance", meaning having more than you need. The problem is that wealth accumulation often causes people to want more, so the scale slides. Other people need hardly nothing. That means there is no way to create one universal standard as the author attempted. You can measure net worth, but anything beyond that is subjective.

4 Reply

John Nachtigall

Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes

8y

The issue is that "wealth/wealthy" is a subjective term that is a combination of 3 actual financial terms

- salary/cash flow

- net worth (the normal definition of wealth)

- liquidity

Every person places a different percentage on how important each of those factors are. Lately people have been obsessing over salary, but in actuality that is the wrong measure.

For example, if you make more than $32,400 you are in the worldwide 1% for salary. You own more "wealth" than the other 99% of the world. You are responsible for the income inequality, you have wealth privilege and are generally considered an evil person, just read any blog on Medium (lol). So if you consider salary to be the most important factor most of America is in the ultra wealthy 1%. But in reality, if you make $40,000 and spend $60,000 you are not wealthy at all.

In actuality, net worth is the proper measure of wealth. You need 770,000 to be in the 1% (worldwide). More importantly, this is an actual measure of assets - liabilities. BTW, this would be the proper definition of assets/liabilities not the Robert Kiyosaki definition, so the "dead equity" in your house counts. But if you own a lot of assets with no income, this can lead to being "house poor" which is were liquidity comes in.

Liquidity is basically the financial equivalent of flexibility. Flexibility = choices. More Choices = a better chance of making more money. This is also where emergency funds come in. illiquid investments just are not as valuable. They can, however, grow wealth, so holding 1 million in cash is not a great way to get to 2 million. Hence why balance is needed.

Some examples, and my personal opinions

Example 1: Person owns 10 homes worth 1 million with cash flow of $36,000 a year ($300 per door per month) and 6 months of savings, $18,000. They owe $800,000 in mortgage. So they have an income of $36,000 per year and $218,000 in net worth. Not wealthy in my opinion, probably barely able to save anything each month.

Example 2: Person has $1 million in stocks/bonds, a $36,000 a year job and $18,000 in the bank. So same as above but a net worth of 1,018,000. Well into the top 1% worldwide, but based on US standards....middle class. if that 1 million is in a 401k with 4% per year withdrawals they have continue their current lifestyle forever. A much better position than example 1. Also much more liquid, as the stocks can be converted to cash in 1 day, even in a 401k.

Example 3: Owner of a small hardware store. He takes $36,000 a year in salary. The store is worth a million dollars if sold. same $18,000 in savings. So basically the same as example 2 but no liquidity. If he wants to retire he has to sell the business to convert into cash. Better wealth than example 1 but not as good as example 2

So my question would be "what is your net worth, and how are you growing it/protecting it depending on your stage in life" not "are you wealthy"

Article the facts were taken from

https://www.investopedia.com/articles/personal-fin...

2 Reply

Marcus Johnson

Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes

8y

What a stupid way to calculate well let me give you an example an 40-year-old orthopedic surgeon making $350,000 year driving a fancy car that is leased, going on expensive vacations and live in a mansion and has $500,000 saved in retirement. The wife doesn’t work. There net worth is 800,000. Now you have a web designer and a teacher making a combined income of 150,000. Both of their vehicles are Five years old and paid for, you take very few vacations and live in a very modest house in a good school district. But at age 40 they have a net worth of $1 million. This example is very calm and just read the book millionaire next-door. The couple that only makes 150000 a year are doing way better investing their money and not buying appreciative assets or liabilities. I would consider this couple more wealthy even though their salary is $200,000 less.

2 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

This kind of thing is always fun - well sort of until my analysis makes me feel inadequate or gives me the "big head". I get it - the temptation to compare things is irresistible. But it was Theodore Roosevelt who reminded us that "comparison is the thief of joy".

Income - outgo - staying power - It's way more about about the attitude than the decimal point!

I woke up today - that makes me healthy.

I could choose where I wanted to get a cup of coffee from - That makes me wealthy.

I married a fantastic woman who has provided me with 4 strong upright sons and cash flow from her own endeavors - that makes me wise.

Feelin Lucky!

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5 Reply

Aaron Hall

Reston, VA · Member since 2014 · 74 posts · 24 votes

8y

I have to agree with @Anthony Gayden. While I think everyone has their own idea of what wealth is, personally I would feel much wealthier knowing I have a residual income stream coming in month after month.

0 Reply

Dan D.

Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes

8y

I think what the discussion and article supports is that "wealth" for many is more of a state of mind than a financial number. I think wealth has more to do with an abundance of time than an abundance of money.

If you read about the ultra-saver groups where they are retired at age 27 living in a tent or sailing a boat, they consider themselves wealthy because they have the abundance of time on their side.

The abundance of time to do what you want 7 days a week is wealth. The having huge houses, nice cars, and high salaries can create wealth, but if you aren't making yourself more able to be independent of your need to commit your time to a business or company against your free will, you aren't inching towards wealth.

My wife and I aren't fond of raising kids in a tent though, so we aren't as wealthy as a 27 year old retired blogger, but the blogger doesn't have the wealth of the experiences my wife and kids provide me.

Wealth is in the eye of the beholder.

1 Reply

Jerry Shen

Denver, CO · Member since 2016 · 114 posts · 99 votes

8y

Originally posted by @Dan D.:

I think what the discussion and article supports is that "wealth" for many is more of a state of mind than a financial number. I think wealth has more to do with an abundance of time than an abundance of money.

If you read about the ultra-saver groups where they are retired at age 27 living in a tent or sailing a boat, they consider themselves wealthy because they have the abundance of time on their side.

The abundance of time to do what you want 7 days a week is wealth. The having huge houses, nice cars, and high salaries can create wealth, but if you aren't making yourself more able to be independent of your need to commit your time to a business or company against your free will, you aren't inching towards wealth.

My wife and I aren't fond of raising kids in a tent though, so we aren't as wealthy as a 27 year old retired blogger, but the blogger doesn't have the wealth of the experiences my wife and kids provide me.

Wealth is in the eye of the beholder.

I don't really agree wealth is a state of mind. I do think it's an actual milestone but it might differ between person to person so you may not be able to peg a specific number to it. But if we go by a time definition a bum would be wealthy he has all the time in the world.

And extreme savers I don't really count because I think if you are wealthy you shouldn't have to make those types of compromises. Otherwise what's the point of being wealthy? I do agree that extra time comes with wealth but a lot of things that cost a ton of money actually save you time (housekeeping, private chef, eating out, etc). If you enjoy those things then fine but if you have to do a lot of things yourself just to save then I wouldn't say that is wealthy. Wealth means being able to do whatever the hell you want when you want.

Most financial planners will tell you a net worth of $2-$10M will provide enough for retirement and financial freedom. From my experience I think that is in the right ballpark for someone living in the United States.

4 Reply

DL Martin

Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes

8y

Originally posted by @Marcus Johnson:

What a stupid way to calculate well let me give you an example an 40-year-old orthopedic surgeon making $350,000 year driving a fancy car that is leased, going on expensive vacations and live in a mansion and has $500,000 saved in retirement. The wife doesn’t work. There net worth is 800,000.

Now you have a web designer and a teacher making a combined income of 150,000. Both of their vehicles are Five years old and paid for, you take very few vacations and live in a very modest house in a good school district. But at age 40 they have a net worth of $1 million.

This example is very calm and just read the book millionaire next-door. The couple that only makes 150000 a year are doing way better investing their money and not buying appreciative assets or liabilities. I would consider this couple more wealthy even though their salary is $200,000 less.

No.

The Surgeon's wife is a stay at home mom. The Surgeon is wealthy.

The web designer can't even afford to raise his own kids so he has to send his wife to work.

Further, the Surgeon has incremental ownership in his Surgery and Rehab Center so he is earning both W2 income and business income, along with the tax advantages that come with it.

The web designer won't let his wife quit her teaching job because the greedy web designer wants the teacher's health insurance and teacher's public employee pension.

Now, tell me again who is wealthy?

DL

p.s. two of my closest friends here in Cincinnati are MD's. One a surgeon, the other an ER doc. BOTH are partners in their Medical Groups, both of their wives are Stay At Home Mom's. Trust me when I say that they have pretty nice lives.

1 Reply

Dan D.

Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes

8y

Originally posted by @Jerry Shen:

Originally posted by @Dan D.:

I think what the discussion and article supports is that "wealth" for many is more of a state of mind than a financial number. I think wealth has more to do with an abundance of time than an abundance of money.

If you read about the ultra-saver groups where they are retired at age 27 living in a tent or sailing a boat, they consider themselves wealthy because they have the abundance of time on their side.

The abundance of time to do what you want 7 days a week is wealth. The having huge houses, nice cars, and high salaries can create wealth, but if you aren't making yourself more able to be independent of your need to commit your time to a business or company against your free will, you aren't inching towards wealth.

My wife and I aren't fond of raising kids in a tent though, so we aren't as wealthy as a 27 year old retired blogger, but the blogger doesn't have the wealth of the experiences my wife and kids provide me.

Wealth is in the eye of the beholder.

I don't really agree wealth is a state of mind. I do think it's an actual milestone but it might differ between person to person so you may not be able to peg a specific number to it. But if we go by a time definition a bum would be wealthy he has all the time in the world.

And extreme savers I don't really count because I think if you are wealthy you shouldn't have to make those types of compromises. Otherwise what's the point of being wealthy? I do agree that extra time comes with wealth but a lot of things that cost a ton of money actually save you time (housekeeping, private chef, eating out, etc). If you enjoy those things then fine but if you have to do a lot of things yourself just to save then I wouldn't say that is wealthy. Wealth means being able to do whatever the hell you want when you want.

Most financial planners will tell you a net worth of $2-$10M will provide enough for retirement and financial freedom. From my experience I think that is in the right ballpark for someone living in the United States.

I disagree.

A bum likely wouldn't consider themselves wealthy. If they do, then maybe they are fine.

If the extreme savers are doing everything they want to be doing and enjoying the time they want to spend with the people who they want to spend time with and they are experiencing the experiences they want to, then how are they not wealthy?

By your definition, very few will ever be wealthy enough to do whatever you want whenever you want. You're essentially saying it's someone who could afford to acquire or achieve all of their goals.

The only way to achieve this is that your pursuits are so limited that you can afford to buy them.

The mind and the adventures you mind may want to pursue are infinite.

Does one want to buy a Maserati if one doesn't know it exists? The more limited one's mind would be, the better their options to achieve wealthy by your definition because each new thought and idea would broaden your world and make it less likely you'll achieve wealth.

By your definition, the person with the least imaginative mind would have the best odds of being wealthy.

That's why the super-savers, who consciously turn off the pursuit of material goods and social experiences are often the ones with the best odds of retiring early.

0 Reply

Dan D.

Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes

8y

Originally posted by @DL Martin:

Originally posted by @Marcus Johnson:

What a stupid way to calculate well let me give you an example an 40-year-old orthopedic surgeon making $350,000 year driving a fancy car that is leased, going on expensive vacations and live in a mansion and has $500,000 saved in retirement. The wife doesn’t work. There net worth is 800,000.

Now you have a web designer and a teacher making a combined income of 150,000. Both of their vehicles are Five years old and paid for, you take very few vacations and live in a very modest house in a good school district. But at age 40 they have a net worth of $1 million.

This example is very calm and just read the book millionaire next-door. The couple that only makes 150000 a year are doing way better investing their money and not buying appreciative assets or liabilities. I would consider this couple more wealthy even though their salary is $200,000 less.

No.

The Surgeon's wife is a stay at home mom. The Surgeon is wealthy.

The web designer can't even afford to raise his own kids so he has to send his wife to work.

Further, the Surgeon has incremental ownership in his Surgery and Rehab Center so he is earning both W2 income and business income, along with the tax advantages that come with it.

The web designer won't let his wife quit her teaching job because the greedy web designer wants the teacher's health insurance and teacher's public employee pension.

Now, tell me again who is wealthy?

DL

p.s. two of my closest friends here in Cincinnati are MD's. One a surgeon, the other an ER doc. BOTH are partners in their Medical Groups, both of their wives are Stay At Home Mom's. Trust me when I say that they have pretty nice lives.

Good example.

Wealth has more to do with time than it does money.

The ability to have your wife at home with the kids when they come home from school is wealth.

Having both spouse work with kids spending time in day-care or after-school programs having experiences with strangers instead of parents is the lack of wealth.

In the end, the person working two jobs may retire with more cash than the surgeon, but the kids who grew up with mom at home have 1,000's of more memories with their real parents.

When both couples are 85, both could buy their dream car, but at that stage in life, one will recall the memories of greeting their kids at the bus stop. Which has more value at that point? The car or the memories?