Wealth Has Little to Do With Income

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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27 Comments
  1. I completely agree with you. Just because you make $1 Million a year doesn’t make you wealthy. You can spend $1,000,001.00 and be broke at the same time. It all has to do with the lifestyle you live and how you feel.

  2. Excellent point John. It’s like all the well paid athletes and musicians that make a ton of money, but manage to blow it all. I have a blogger friend who is pretty close to the 25 year old example you mentioned. He doesn’t make a ton of money, but because he is careful with how he spends and invests very well, he is well on his way to becoming wealthy.

  3. I know way to many professional accountants who are like the lawyer example you give. They definitely appear wealthy but are far from it. It is often the people who live modestly that have true wealth!

    • I had to laugh at your comment, Lance, because my dad is an accountant and although he doesn’t make an exorbitant income, he definitely has the portfolio of a wealthy man.

      But to the larger point, it is a regional thing. I had friends who did the same job as me in NYC – they made three times what I made in the suburban South.

  4. I totally agree with this post. To me saying you are wealthy because you have a great income is like saying you have a good football team because you score 35 points a game. All that says is that you have a good offense.

    But what if you give up 38 points? In the end you still lose. Having a great income gives you the option to do a lot of things financially, but it does not guarantee financial success.

  5. Great point! I know that I’m deep in debt and while I’m slowly making my way out of it-my brother, who makes a little over double what I make plus gets mandatory over time, is declaring bankruptcy and has no savings. I know that I will eventually have a decent savings and a retirement plan.

  6. I don’t know why anyone would get upset about being called “middle class” even if they’re making up to $250k/yr. Most people are middle class. Middle class Americans still have smartphones and cars, nice houses, etc. Some even have boats and other big, fancy toys. I’ve cringed at a lot of things Mr. Romney has said, but calling anyone who makes less that $250k/yr middle class wasn’t one of them! I do agree with you that those that make $200k/yr but aren’t saving any are less wealthy than someone who has been saving a good chunk of their $50k salary away for the future, though. The problem is that everyone wants to flaunt their money. If we made $200k+ per year, I’m sure we’d be tempted to do the same, but hopefully we’d be smart enough to pay our future selves before splurging on the boat we’ve always wanted. ;)

  7. I used to believe in that popular myth about high incomes being equivalent to a lot of wealth. Now when I see people spending money on flashy things and the big houses, I just shake my head and think to myself, why?!?! We can be so obssessed with materialistic things, accumulating STUFF, rather than focusing on accumulating WEALTH.

  8. Wow that’s a great line! I might have to steal it haha. “Wealth is about what you keep, not what you earn” I feel like that definitely applies to me! I am definitely making above average for my age, but I am maxing out everything and still saving a decent amount per month. But it’s not easy to do all that. I don’t get to do everything I want, and I think that’s what people need to understand. You have to sacrifice in one category like cars and food, if you want to travel the world. You can’t do it all :)

  9. It’s all about what you do with it. That’s for sure. I had $100,000 at age 18, but I blew it all and don’t really have anything to show for it. I could have invested it well and been set for a long time, but I didn’t.

    Income is a great tool for building wealth, but you have to make the right choices to get there.

  10. Great Points John. It really is what you keep (i.e. Save). Being able to save 3k a month should make you pass from middle class to upper class in no time, especially if you are earning dividends on that $$ saved. Best of Luck!

  11. Great post, John! I immediately thought of two famillies: both had several children (one had 5 and the other 6), and made less than $75k. Both had a commitment to savings that helped them create magnificent portfolios. They always seemed happy and had nice things…because they focused on what was important instead of on EVERYTHING.

  12. John, this is great! For me, wealth is about being able to take care of yourself without a dependence on anyone else. And certainly saving more than you make (as you illustrate here) is all a part of that equation. I can’t wait to be like the old man in your example, but only I plan to be much younger!

  13. People that earn a very nice salary but dont save…well, that’s unfortunate. There really are people who make regular, modest incomes that can have greater wealth than those who make more yet save little.

    Saving is simply an essential part of a strategy to gain wealth. Can’t invest anything if you’re not saving anything in the first place. Of course, we do need to focus on income generation, so how much one makes does in reality matter. But we have to save.

  14. Love the way you tell this story… Now if only we could get the rest of the world to read it and realise the importance of saving!

  15. Well said! Living below your means and saving the rest is definitely the way to build wealth. No matter how much cash you earn.

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