What Is Wealth?

Wealth Explained in Less Than 5 Minutes

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Table of Contents
Table of Contents

Wealth is an individual’s or household’s net worth, which consists of assets such as money in savings and investment accounts minus debts like loans and mortgages.

Understanding the definition of wealth can help individuals determine a personal baseline to measure their own savings and income-producing assets, and make a plan to build their own wealth.

Definition and Examples of Wealth

Wealth is often regarded as household net worth, which is the total value of assets minus any debt (“liabilities”). Therefore, if an individual or household owns an asset, then they have the potential for wealth, depending on the size of their debt, and their own perception of how much money it takes to be “wealthy.”

“You can value wealth in many different ways,” Matthew Ricks, a certified financial planner and president of Haystack Financial Planning, told The Balance by email. “For some, it’s being free of a mortgage. [Others] will say it takes owning $1 million. Some say multi-millions. It’s so individual.”

Ricks went on to note that income and wealth are not the same things; just because you earn a lot of money doesn’t mean you’re wealthy.

“Look at all the singers and athletes who go bankrupt,” Ricks said. “They made a lot and then spent even more.”

There is subjectivity in how individuals define “wealth.” For instance, in a survey of 1,000 Americans, brokerage firm Charles Schwab learned that most believe an average of $1.9 million in personal net worth is necessary to be considered “wealthy” in 2021, but the previous year’s respondents said “wealthy” was $2.6 million in net worth.

How Wealth Works

In most cases, wealth is inherited or self-made. To develop wealth, you must first define what wealth means to you. Once you’re aware of your own definitions, you can begin to gather information and make a plan to build wealth.

“You really have to think about what you want out of it,” Ricks said. “Do you want to work specific hours or make [a] specific [amount of] money? Do you want to own a successful business or have the freedom to buy time?”

To begin building wealth, it helps to calculate your net worth: Subtract your assets from your debt. You can then develop a wealth plan, which has key components that include saving, investing, paying down debt, and protecting the assets you accumulate.

“Assets” include cash in savings, interest earned from savings, and investments in stocks and funds.

Once you’ve begun the journey, you can work to increase your net worth, which is also an increase in your wealth. As your wealth grows, you might consider seeking help in managing and protecting it.

Protecting your assets is a good idea with any income. Adequate insurance and asset protection plans can be important parts of your overall financial plan. Building wealth can take time, and preserving what you’ve built will help create peace of mind.

Disparities in Generational Wealth and Pay Can Affect Wealth

Not everyone starts out on the same financial foundation when they try to build wealth. Systemic issues can make it more difficult to build wealth.

For example, there is a long-standing wealth disparity between households of different racial and ethnic groups as compared to white households. In 2019, households that were White had eight times the wealth of Black families and five times the wealth of Hispanic families, on average.

Women’s wealth can be affected by the gender pay gap, which is the difference in earnings between women and men. Overall, women earned 82.3% of what men earned in 2020. Black women earned just 63% of what non-Hispanic White men earned in 2019, and Latina women earned 45% less than White men.

Because the ability to build wealth is influenced by many factors, there is no one-size-fits-all approach to building wealth.

Types of Wealth

Financial advisors and wealth managers assign categories to individuals and households that have reached certain milestones in their net worth or collection of assets.

Mass Affluent

For instance, people who hold between $250,000 and $499,999 in assets are considered “mass affluent.” The mass affluent have often grown up in middle-class households, and they have likely earned instead of inherited their wealth.

High-Net-Worth Individuals

While definitions of high-net-worth individuals (HNWI) can vary, the SEC considers HNWIs those who have a net worth of more than $1.5 million or at least $750,000 under management.

Ultra-High-Net-Worth Individuals

Ultra-high-net-worth individuals (UHNWI) are those who have more than $30 million in net assets. The United States has the most UHNWIs, followed by China. The majority of UHNWI are male, and 85% of UHNWI wealth is held by those who are 50 or older, according to the Milken Institute.

Key Takeaways

  • Wealth is an individual’s or household’s net worth.
  • Personal definitions of wealth are highly subjective.
  • Racial and gender pay gaps can hinder wealth development.
  • Build wealth by accumulating assets in the form of savings and income-generating assets.
  • Protect your wealth with adequate insurance and an asset protection plan, if necessary.