I’ve been studying the wealthy and the poor since 2004. One of the things that I’ve noticed is that almost 100% of the time the media misinforms its readers with respect to the definition of wealth. So, I thought I’d clear it up for you using the same language used by the media.
Three Categories of Wealth:
- Affluent – These are individuals with net assets (assets minus liabilities) of between $1 million – $3 million.
- High Net Worth – These are individuals with net assets (assets minus liabilities) of between $3 million and $6 million.
- Ultra High Net Worth – These are the individuals with net assets (assets minus liabilities) $6 million and above.
In my Rich Habits Study only High Net Worth and Ultra High Net Worth individuals made the cut. But, in addition to having a High Net Worth, in my study they needed to also have an annual gross income of $160,000 or more.
Below is the two-part test every wealthy individual needed to satisfy in order to meet my definition of Wealthy, for my Rich Habits Study:
- Net Assets of $3.2 million or more AND
- Gross Income of $160,000 or more.
Some might argue that those individuals who meet the Affluent category of between $1 million and $3 million are “Wealthy” as well. And you might be right.
In order for the Affluent to be considered “wealthy”, however, they would need to live a somewhat modest lifestyle, one in which their cost of living ranges between $2,500 – $8,500 a month.
Since the biggest component of your cost of living is your housing costs, if you live in an area where housing costs are low, your cost of living will be low and it will be easier for an Affluent individual to consider themselves “wealthy”.
If, however, an Affluent individual lives in expensive area, where housing costs are very high, it would be very hard for them to be considered “wealthy”.
Examples always work best, so let me give you one.
Let’s say you have net assets totaling $2 million. And let’s say that that $2 million is sitting in an annuity or some other type of investment kicking off 4% of annual taxable income, or $80,000. If you are in the 20% Federal and State tax bracket that leaves you with $64,000, or $5,333 per month.
If on this $64,000 you are able to do the things you want to do in life and, at the same time, meet all of your living expenses, then you are “wealthy”.
Doing what you want to do and meeting your living expenses represents your Standard of Living.
The important point here is that being “wealthy” means the passive income stream from your Net Assets, after you pay your taxes, is more than enough to meet all of the costs that fund your standard of living.
Now, you might also argue that 4% is too conservative a number and that it is possible to earn more income than 4% on your $2 million. This is called chasing yield and whenever you chase yield you must take on additional risk. The downside of finding an investment that pays more than 4% is the potential that that investment might return less than 4%. There are plenty of investment options out there that guarantee between 4% – 5% return without taking on any unnecessary risk. But there are not many investments out there that guarantee more than 5%. (Disclosure: my advice to you would be to find a qualified financial professional who can help you meet your investment goals.)
Those who are truly wealthy do not need to “work” in order to meet their standard of living. Their net assets generate all the income they need to live the life they want to live, without the need to work in order to subsidize their standard of living.