Archive for September 27, 2012

Wealth Has Little to Do With Income

Photo by Cohdra via MorgueFile

For me, the definitions of “rich,” “poor,” and “middle-class” have very little (if anything) to do with income.

And before you roll your eyes, this is not a sentimental post about how wealth isn’t measured by money, because YES VIRGINIA, it is measured in money.

Of course it would be a stretch to say that someone making minimum-wage income could be considered rich, but it isn’t much of a stretch to say that a homeless person could have a higher net worth than the shiny lawyer behind the windshield he just squeegeed.

This means that Mitt Romney was partially right when he suggested that “middle-class” means people who make $250,000 or less per year. Definitions of social class based on income are at best only coherent on a regional level, and as a whole are unhelpful.

To someone who makes $10 million per year, someone making $250k is a mere peasant, a dirty beggar.

 

Wealth is About What You Keep, Not What You Earn

What I’m trying to say is, your true wealth is built by what is left over at the end of the month, after the bills are paid and the bellies are filled.

If you are making 200k per year and spending 300k each year, you are not wealthy, and you are probably further away from financial independence than many working for minimum wage.

Take my household for example. We are solidly-middle class.

But because we are debt free (minus the house) and have a decent household income (that was acquired by student loans), we are finally at a point in our lives where we are able to save nearly $3,000 per month. If this trend continues for 20 years, we’d have $720,000 (more if an annual investment return is assumed); I am more than confident that I could live 20 years on that money alone. I wouldn’t be able to buy the fancy cars and flashy jewelry that most morons use to determine wealth, but I’d be able to continue my comfortable, independent and frugal lifestyle.

At a time when half the population reports that it couldn’t come up with $2,000 in cash inside 30 days, saving more than that each month must certainly push my family’s needle closer to RICH than POOR, right?

 

A Wealthy Man Built on $50,000 Per Year?

Take for example a hypothetical young man with a plan. At the age of 25 he secures a job making $50 thousand per year. That would put him essentially at the median wage.

But because he cared about “middle-class issues” like his future and working towards the goal of retirement, he lived well below his means and was able to save $2,000 per month, or about half of his salary.

After 25 years at age 50 he decides to retire. In his bank account sits $600,000 in cash (assuming that he invested in nothing). If we plug his balance into a retirement withdrawal calculator and assume a standard assumption of a 4% annual withdrawal (also factoring in a very conservative annual return of 2% over a 30 year period and 3% inflation), he would still have almost $128,000 in the bank after 30 years.

The point is, if he were to bump into a 65 year old man at the retirees mixer, the older man would likely assume that he was in the presence of a wealthy man.

He would be right.

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