What Constitutes a Millionaire?
Liquid assets and net worth determine if you're a millionaire
The word "millionaire" is bantered about in our daily conversations. The term usually evokes images of celebrities, athletes, and business leaders. We assume Kim Kardashian, Dennis Rodman and the CEO of Pepsi are all millionaires.
Millionaires and Net Worth
The technical definition of "millionaire" is a person (or a married couple) with a net worth that's greater than $1 million U.S. dollars (or equal currency).
Net worth represents a person's assets, minus their liabilities. Net worth is described as "what you own minus what you owe." However, defining a millionaire is not cut-and-dry. Let's take a look at what constitutes a millionaire, especially when you factor in assets that are not liquid.
What a Millionaire Looks Like
Let's say that John Doe has the following assets:
- House: $350,000
- Car: $10,000
- Retirement Fund: $600,000
- Stock Fund: $80,000
- Mutual Fund: $100,000
- Re-Sale Value of Items in His Home (Clothes, TV, furniture, art, and antiques): $20,000
- Cash: $10,000
- Total Assets: $1,170,000
Let's also imagine that John Doe has the following liabilities:
- Mortgage: $120,000
- Car Loan: $5,000
- Total Liabilities: $125,000
According to the formula of assets versus liabilities, John Doe is a millionaire. However, one school of thought considers John Doe a millionaire while another school of thought disagrees.
Why John Doe Is a Millionaire
The side that argues yes would point out that the value of John's assets equal $1.17 million, and his liabilities total $125,000.
That means his total net worth (assets minus liabilities) is $1,045,000. By definition, that makes him a millionaire.
Why John Doe Isn't a Millionaire
The side that argues "no" would say that the value of his home, his car and his personal belongings (such as his clothes, TV, furniture, art, and antiques) should not be counted.
After all, he's most likely not going to liquidate those assets or sell them for cash. Also, he needs to live somewhere and he needs to drive a car. He needs to wear clothes, eat at a table, and sit on a couch. His art and antiques may not have any resale value or only be of personal value and meaning.
What to include in net worth calculations is commonly the subject of debate and many people calculate it differently.
The Debate Over Liquid Assets and Net Worth
The "no" side argues that only his liquid assets should be considered. These include his mutual funds, stock funds, and cash. Some people would also count the value of his retirement account; others wouldn't, given that those assets are protected from bankruptcy filings. Either way, John Doe is not a millionaire once those personal belongings are left out of the equation.
Yet another school of thought would adjust the value of John's house, car, and personal possessions. Yes, he needs to live somewhere, but he doesn't need a $350,000 house. They would "credit" him with a housing allowance, and count any excess toward his net worth.
In the end, there is no agreement as to whether or not John Doe is a millionaire but one thing is certain; John Doe doesn't have a huge amount of cash in the bank.
Most of his money is tied up in housing and investments. Just because he's (arguably) a millionaire on paper doesn't mean he can spend as lavishly as Kim Kardashian.