Am I Wealthy?
I am asked this question by clients and prospective clients all the time, but I don’t know that I’ve ever in the moment answered as well as I should. So this post will be my cathartic attempt at redemption. But before we can answer the title question, we must answer another one: What is Wealth?
Many would associate wealth with tangible items - things we can see, things we can touch, money we can spend. Big salary, big house, big car. These things exude wealth, right? But does the possession of these things really mean you’re wealthy? Maybe… but I would argue that wealth is more intangible.
Legendary financial industry author Nick Murray actually defines wealth in his best-selling book “Simple Wealth, Inevitable Wealth”
“Wealth isn’t a thing, nor is it any accumulation of things.
Above all, it isn’t a certain number of dollars”
He goes on to add…
“Wealth frees you from financial worry…..No matter how much money you have,
if you’re still worried, you aren’t wealthy”
So then, wealth is a state of mind you achieve when you have confidence in where you are and where you’re heading financially. Wealth is feeling that you’re saving enough towards retirement to maintain a comfortable and enjoyable standard of living at the retirement age of your choice. Wealth is having a plan in place to payoff your debts in a timely fashion, freeing you to spend more time and resources on things that bring you joy. Wealth is reaching a point where you’re not concerned about outliving your assets and can begin focusing on what kind of legacy you’d like to pass on to your family or what organizations you’d like to support. I believe these are the true signs of wealth, and there is not some magical income level or dollar amount that makes it possible. Earning more money and having more money, if managed properly, may make it easier to become wealthy. However, these things do not necessarily constitute wealth in and of themselves.
In fact, based on the aforementioned qualifications of wealth, someone earning a far smaller salary, with proper planning, can realize equal or greater levels of wealth than someone earning 5x that amount. Consider the following example:
Individual #1 earns $250,000 a year, lives in a million dollar home, he and his wife both drive $75,000 luxury vehicles, and the kids are in private schools. On the surface, tangibly, this individual appears wealthy. But as we peel back the layers, we find that while he does enjoy luxuries, he does not enjoy financial freedom. He owes $800,000 on his home on a 30 year note that he’ll be paying well into retirement. He owes $60,000 on each car, assets which are depreciating far faster than he’s paying them down, a situation he’s likely to endure over and over again. He’s spending so much on private schools that he’s unable to put money away for the kid’s college, all but ensuring they’ll be saddled with significant debts as they try to begin their adult lives. What if he needs to be saving $40-50,000 a year towards his own retirement to be able to stop working at any point and maintain his current standard of living, but he’s only able to muster a fraction of that? He would either have to continue working until he’s well into his 70’s, or make some difficult choices as it pertains to lifestyle. However, it’s very difficult to reduce your standard of living once you become accustomed to it, so maybe he just assumes he will work forever. This man, despite all of the luxuries his family enjoys, has no financial freedom. He is not free of financial burdens. In fact, I would say he’s a prisoner to his financial situation. Despite the big salary and the luxury lifestyle, He is not wealthy.
Individual #2 and his wife each earn $50,000 a year. His family lives in a modest $200,000 home that is nearly paid for. He and his wife drive economical vehicles that they own outright. They both save 15% of their incomes into 401(k)s and contribute what they can to 529 accounts for their kids. Through comprehensive financial planning with their advisor, they are confident that they’ll be debt free prior to retirement and they’ll be able to maintain their current standard of living on their social security benefits alone. The diligent saving they’re doing along the way helps provide them with a nest egg that represents freedom and flexibility throughout retirement. They know they’ve planned, so they feel they may even be able to retire early. They feel free to travel more. They feel free to take on that kitchen renovation they’ve always wanted. They feel free to help out their grandkids and donate to charities. They feel free to fearlessly pursue their passions. They’re wealthy. And they may even be able to pass on that freedom to future generations.
They earn a fraction of the salary, live in a fraction of the home, drive a fraction of the car. However, they’re the wealthy ones in this example because they’ve achieved the intangible confidence of financial freedom.
So, if we define wealth as the state of mind you achieve when you are in control of your finances and feel free to pursue your passions, we can now answer the title question: Am I Wealthy?
As it turns out, it’s not for me or anyone else to decide. If you ask me, “Am I Wealthy”, I would have to ask you, “Do you feel confident in your financial future and thus free to pursue your passions?” If your answer is yes, then so is mine.
If your answer is no, then you probably need the services of a professional financial planner more than you ever imagined. A financial planner can help you understand where you are and where you’re heading. A planner can help you prioritize your goals and implement strategies to pursue them. A financial planner can help you change your financial trajectory and put you on a path towards financial freedom. And if you ask me (and Nick Murray), that’s how you become wealthy.
This article is provided for informational purposes only. It should also not be construed as advice meeting the particular investment needs of any investor and no forward looking statement can be guaranteed. There is no assurance that any investment strategy will be successful. Investing involves risk and the potential to lose principal. Please discuss any financial matters with qualified professional prior to making financial decisions. 05/19