The TRUE Definition of Wealth
In the United States, we have a very bland, and standard definition of wealth. To most people, wealth is being a heavy spender on goods and owning expensive “luxuries.” We, the people of the United States, fall under a consumption-based society. We consume at a high level, buying fancy cars, fancy clothes, large houses, and to others, that is a perception of wealth. I wanted to share the true facts about wealth in our society and what being a millionaire truly means.
Roughly about 80% of millionaires in the United States are created in the first generation. This means that they did not come from millionaire families, and they did not in most cases, inherit large amounts of money. When we see somebody driving down the road in a 2010 Ford Fusion, we typically assume they are someone who could never be a millionaire. However, when we look at somebody driving a Porsche GT3 down the road, we automatically assume two things. 1) This person is rich. 2) This person is a millionaire. In some cases, these assumptions can possibly be true. However, the true facts might surprise you. The majority of people who live large life-styles are not rich. In most cases, they make large sums of money a year. For our example, let’s look at Dr. T. Dr. T is a medical doctor who makes $200,000 a year and lives a large life style. Dr. T drives a newer model European car, lives in a pricey house, and takes his family on luxury vacations. When we look at Dr. T from the outside, we would assume that he is very wealthy and has no financial worries. But what is Dr. T’s net worth? He only has a total net worth of $448,000. Not bad, right? However, this is not nearly close to what his actual net worth could be. It is important to mention that Dr. T is fifty-five years old. What should his actual net worth be? Dr. T’s expected net worth should be 1.1 million. We find his net worth by multiplying his age (55) by his salary (200,000) and get the number 11,000,000 (11 Million.) Then, we divide by ten. However, Dr. T is not even close to what he is net worth should be. Why? Because he lives an extremely high consumption life style. People always wonder why the rich get richer and the poor get poorer, and this can be answered by one easy statement. The rich wait to buy things when they have the money, and the poor continue to buy without the money. When you stock up on debt, you have no actual money. You are not rich but instead trapped in a fancy prison of bank notes. If Dr. T lost his job today, how long would he be able to sustain his family’s life style for? Maybe a year maximum. This set-up is used in a very popular book, The Millionaire next door by Thomas J Stanley, Ph.D. and by William D. Danko, Ph.D. The book talks about the process of obtaining wealth in America.
We hear these analogies that state things such as “I’m not wealthy in money, but I’m wealthy in friends, and that is all that matters.” That is indeed a factual statement because friends, and family should always be more important. But, if you want to be wealthy in money what is the easiest way to achieve it? Living well below one’s means is the fastest way to obtain this goal. This is dependent on your day-to-day habits. Do you go out to lunch every day, or do you only go out to lunch two out of the five days of the week? Then, from there, where do you go to lunch? But this might be too much for you to consider, and while budgeting is your best method, there is an “easier” long-term method. ROTH IRA’s are investment accounts that kick in when you retire, typically at age sixty-five. Let’s assume you in this case you are twenty-four. You start with $5,500. This might be a large portion of your starting balance, but you will never invest this amount again into the ROTH IRA. Assuming you annually contribute $4,000, you are in a good situation. You plan on retiring at 65, and you receive a 7% return rate. You are in the marginal tax bracket of $37,950-$91,900. This is a marginal tax rate of 25%. Your total contribution would be around $164,000 total. Seems like a lot of money, right? However, when you retire at 65, your account will have $1,006,654! The best part about ROTH IRA’s is that you pay taxes up front. At the age of 65, you would be a millionaire from making a small contribution of roughly $333.3 a month. Money is great and all, but what is the true definition of wealth?
I think the truth definition of wealth is being comfortable where you live. Not physically comfortable but comfortable with your bank account. You are not maxing out credit cards, you don’t have a massive mortgage, and you do not have pricey car payments. This is true wealth because you are free from a debt prison. You have money left over, and you have assets to use. To me, the true definition of wealth is not whether you drive fancy cars or not; it is whether you can afford those cars or not. But what do you think? Would you rather have expensive cars and be in debt or a used Ford with money in the bank? Let us know below!