Congratulations everyone! According to this chart below, everybody is rich in America! Our assets are at the highest level compared to our income in all of history thanks to tremendous asset price appreciation.
Anybody who bought stocks and real estate between late 2009 and 2015 is sitting mighty pretty. When you’re sitting mighty pretty, you tend to spend more frivolously and take on debt to buy things you don’t really need. But at some point, a percentage of the population gets carried away, commits financial suicide, and brings the rest of us down with them.
I’m really hoping the good times will last for several more years. After all, it’s more fun making money hand over fist than losing money. Alas, I’m worried that with cash-out refinances reaching pre-crisis levels, we’re bound to repeat our mistakes from the previous financial crises.
How To Tell If You’re Rich
There is a qualitative side and a quantitative side to being rich. If you’re two standard deviations higher than the median household income of $59,000 and the median household net worth of $100,000, you’re considered rich. At a two standard deviation, you’re richer than 97.8% of all Americans.
I think the qualitative side of being rich is much more interesting because being rich is more of a feeling after all your needs are met. Feeling rich also comes from a temporary state of mind. It’s just like experiencing spikes of happiness due to a promotion, a raise, getting into your school of choice, hitting a home run, or getting married, followed by what is hopefully a sustainable level of contentment.
The first time I felt a little bit rich was a couple years after I bought my own place in 2003. The initial years were a little nerve-wracking due to the assumption of $425,000 in debt. But after two years, I felt like everything would be OK since I continued to get promoted. I felt rich because I finally owned a piece of America. No longer was I a price taker in an ever rising rental environment.
The second time I felt rich was when my company agreed to let me go with a severance payment and all my deferred cash and stock. I felt like I had won the lottery because I would have gladly left if they just gave me my deferred cash and stock that paid out over the next five years. But they decided to give me a six-figure lump sum check when I left as well, which has almost doubled since 2012 because I invested all of it in the stock market.
The third time I felt rich was about three years after I left Corporate America. Again, the initial years were a little worrisome despite the severance because I wasn’t sure whether I had made the right move. But by 2015, I knew we were home free as Financial Samurai grew so my wife joined me in early retirement. Having the freedom to choose how we spend 100% of our time was priceless.
The fourth time I felt rich was when our passive income finally reached a level that could sustainably provide for the lifestyle we wanted. Before then, we were only generating about $80,000 a year, which doesn’t go far if you want to raise a family in San Francisco. It was after hitting $200,000 that I felt I could finally slack off a little bit without worrying about falling too much behind.
The most recent time we felt rich was when our son was born. He is a miracle baby because we had tried for several years with no luck. His birth helped crystalize all the effort we had put into studying, saving, investing, working, and taking risks. Since my wife and I are both pretty frugal, using our wealth to provide for someone feels wonderful.
How Rich You Should Feel Based On Net Worth And Income
Given I can’t tell you how to feel, let me introduce to you a simple chart that tells you how you should feel based on a simple net worth-to-income multiple. You can use the average income you’ve earned over the past three years. Or you can separately plug in your personal ideal income where making more brings you no additional happiness. That ideal income figure for us is $300,000 a year for a family of up to four.
Eventually, you will reach a point where you will no longer want to work for anybody or hustle as hard because your wealth is making more money than you need. For example, during a bull market you might see a 10%+ appreciation of your investments for the year. If your net worth is $1 million and it was 100% invested, you might begin to start second-guessing the necessity of working at a $100,000 a year day job.
Hence, it follows that starting at around 10X your average income, you’ll begin to start imagining what being rich really feels like. You’ll start to daydream about what it would be like to actually work at a job you enjoy. Perhaps you might even get enough courage to try becoming an entrepreneur.
When you hit 20X your average income in net worth, you finally begin to actually feel rich. A lot of folks believe that you’re financially independent once you reach 20X your average annual expenses. But I never felt this way because expenses can dramatically increase if you have health issues, experience some type of accident or natural disaster, start a family, or your parents need senior care assistance.
Once you’re over 50X your average income, you are unquestionably really rich, even if you don’t believe it. At 50X, you’re no longer second guessing your spending habits because you likely won’t be able to spend all your money before you die. You only need to earn two percent a year to sustain your lifestyle without touching principal, while the risk free rate of return is currently at 3%.
Having more money no longer brings any sort of happiness. You also begin to feel guilty for having so much. As a result, you give more of your time and money away to institutions and people that need your help the most.
Are these multiples subjective? Yes. But they are also grounded on the principle that the ideal withdrawal rate does not touch principal. Once you have a net worth that will always provide the lifestyle you want that will never decrease in value, you are quantitatively truly rich.
Hoarding Can Be A Disease
Jeff Bezos from Amazon is worth over $100 billion. When asked what he plans to do with his money recently, he said he wants to use his wealth to go to space. Jeff has the incredible ability to ignore the poverty plight within his own Seattle community. Instead, he’d rather hoard as much of his wealth as possible while he is still alive. Yes, he’s revolutionized the way we shop and made consumption cheaper and easier, but come on now.
Given we can only pass down ~$11 million per person death tax-free, hoarding so much more than $11 million, let alone billions, makes little sense as the government will first tax you ~40% and then proceed to squander much of your money.
Therefore, the best strategy for feeling rich is to determine your ideal income for maximum happiness and accumulate at least 20X that income figure. Once you get there, spend your time figuring out as many ways to help other people as possible. The more you give, the richer you feel.
Readers, when did you start finally feeling rich? At what multiple of average income or ideal income do you think you’ll finally feel rich? What does being rich mean to you?