How Much Money It Takes to Be Rich
Have you ever wondered how much money it takes to be considered rich? In one survey (focused on people living in the United States), most seemed to believe that it took between $2 million and $12 million to be rich. This would generate roughly $300,000 in annual passive income and would allow you to afford the following lifestyle all without a job:
- Pay all taxes
- Spend $3,800 per month on housing expenses
- Have $12,000 in cash left over each month to spend any way you like — cars, vacations, clothing, charitable donations, education assistance for your family, entertainment, etc.
Whether or not you agree with that assessment, it's an interesting topic. The qualifications for being rich, how the rich generate money, how investing in stocks, bonds, mutual funds, real estate or other assets can assist you on your journey to becoming rich, and a lot more such as the correlation between education and becoming first-generation rich.
It's also a topic about which I feel passionately after my husband and I had to build our own fortune from scratch, accumulating resources after putting ourselves through school, starting businesses, and growing our capital one intelligent decision at a time. Using concepts such as synthetic equity, we were able to earn six-figures a year as full-time college students. Applying knowledge acquired over the years, I was able to help my younger brother build a hefty personal portfolio during his days in the military, which allowed him to go on and attend medical school with a fraction of the student loan debt many of his colleagues will suffer.
"Rich" Is Almost Always Implicitly Defined as a Relative Term, Not an Absolute Term
A challenging part of determining how much money it takes to be considered rich comes from the fact that when capitalism lifts a vast majority of boats in terms of increases in real purchasing power, as it has done for the past few centuries, the new, elevated standard of living gets taken for granted.
The typical American household today enjoys the highest standard of living of any period in this country's history, despite what the general media impression might cause you to believe. It's so extreme that nearly all American families live a life of more affluence and comfort than John D. Rockefeller did at the height of his wealth.
Technological innovations and productivity increases in even the lowliest places, such as the rise of the modern washing machine, have resulted in the typical American having 40 more hours of relaxation time per week than one of their ancestors did in 1880. Sadly, research has shown that virtually all of this 40-hour gift is consumed by watching television.
Families now have two cars instead of one. The typical footprint of an American home is obscene compared to our grandparents. That home is now climate controlled with air conditioning and central heat. It has on-demand hot and cold water. It's wired for high-speed Internet.
It has televisions capable of displaying brilliant colors with incredible sound, tapped into an infinite library of media that exceeds anything our forbearers could have conceived. The U.S. Government now considers a married couple with two kids making $44,000 to be in poverty under certain definitions; an obscene thing when you consider that puts the family in the top 1 percent to 2 percent of global affluence.
In other words, those bemoaning the current state of the middle class are largely displaying their economic ignorance. Yes, it should be better. Yes, healthcare and education costs are rising beyond what is sustainable due, in no small part, to perverse government incentives, inflating a bubble along the way just as was done in housing last decade.
It doesn't change the fact that there has never been a better time to be alive for a super-majority of the citizens of this country. Still, that's not what people mean when they ask, "What is rich?". This is because of two fascinating quirks in human evolution that behavioral finance has given insight into in recent years.
- People are satisfied by the perceived trajectory of their life, not necessarily the absolute quality of their life once certain minimum needs have been met. That is, a person who goes from making $25,000 a year to $150,000 a year is going to feel more happiness than a person who goes from making $10,000,000 a year to $500,000 a year despite the fact that the latter is still among the highest-earning households in the United States and earns far more than the former.
- People are satisfied by being materially, but not necessary excessively, richer than their peers, family members, friends, colleagues, and neighbors. It is not an accident that the amount of annual income at which personal happiness tops out is about 50 percent higher than the median household income. There is also an element of envy present. To borrow an example put forth by a well-known investor, you see traders ecstatic to get a $1,000,000 bonus on Wall Street until they realize the guy at the next desk got $2,000,000; then they are miserable. In most cases, it's irrational but people develop grudges, hurt their own reputations, become spiteful, and, in some cases, outright hostile because of a perceived lack of fairness. The money, in other words, has become a proxy for emotional considerations — how valued the person is, how intelligent they are perceived to be, how necessary they are to the team.
How to Determine Whether Someone Is Rich or Not
- The Absolutely Rich: On a global scale, I think the line probably starts somewhere around $80,000 per annum. A family earning that amount in the United States, and run by someone who is financially intelligent, will enjoy a standard of living that utterly surpasses, in every meaningful way, the experience of a vast majority of people alive on planet Earth, both now and at any time in history. On a country-specific scale, I think it begins somewhere around $400,000 in household income here in the United States. The absolute purchasing power is staggering compared to the typical family and opens doors that most don't even know exist. You've definitely crossed into that territory once you get into what one academic researcher called "the glittering rich", which is pre-tax household income of $3,000,000 to $5,000,000 per annum beyond which additional sums of money lose their personal utility and become little more than a scorecard.
- The Relatively Rich: If forced to draw the line somewhere, I'd probably do so at the top 5% to 10% of household income, perhaps adjusted by geographic peculiarities, because it means that a family in that situation is out-earning 90 to 95 out of 100 other families.
- The Truly Rich: Someone can be considered rich based on a simple relationship between personal desires, control over time, and insulation from financial disaster. That is, a person becomes rich the moment 1. he (or she) can afford the lifestyle he desires solely from a stream of passive income or from a career that does not exist at the mercy of others and therefore cannot be taken away easily, and 2. is able to spend his time doing precisely what he wants, when he wants, how he wants, where he wants. Thus, there are situations in which I may consider someone earning $50,000 a year to be rich while someone earning $2,000,000 a year something else entirely.
Your goal as a new investor should not be to merely pile up treasure endlessly at the expense of the products, services, and experiences you want for your life. Instead, it should be to find out what it is you want, how much monthly cash you need to afford it, and then we can work on calculating the total investments that would be required to service that lifestyle.
Money is a tool that exists to serve you. It would be an extraordinarily dumb thing to spend your life slaving away to accumulate resources that you will never enjoy if doing so comes at the expense of your own happiness. The key, as in so many areas in life, is to "know thyself". If you are fortunate enough to be average, when you were born, 27,375 days were deposited into your mortal bank account.
You've already spent quite a few of them. One day, the clock will run out so you might as well make sure you get the most enjoyment out of each of those days you've been gifted through no virtue or merit of your own. Go through life collecting assets, avoiding liabilities; pay attention to asset placement; figure out how to get paid to do what you love. For some, that might be living in a cabin in Colorado, fishing and reading all day, hunting with your beloved dog, and learning to play an instrument.
For others, it might mean expensive cars, a wardrobe of bespoke Ede and Ravenscroft with matching bespoke George Cleverley shoes, wearing Creed Bois du Portugal as you study your portfolio in your newly built custom Clive Christian study glancing at your $250,000 Patek Phillipe Grand Complications watch with flawless diamonds. There is no right and wrong answer. One is not better than the other. They are merely different; a matter of personal taste much the same as some preferring beef and others preferring chicken.