When I was a kid, and even after I grew up I heard other kids describe some families as “They are rich” when discussing some affluence. The word ‘rich’ was used as a proxy for the statement ‘they have nice things that we don’t have’. Sometimes it was a pool. Sometimes it was a new vehicle for a high school graduate. For me, in 1988, the rich family meant the household in question had a separate wired phone line for their kids to use. This was a big deal in the pre-internet and pre-cellular age when most homes only had one phone line and parents battled with children over access. The household phone line was the only social outlet for kids who were at home so the teens of the 1980’s lived on the phone. This made it very difficult for parents to receive important calls. A second line fixed this problem quite nicely even if it was somewhat costly.
Kid’s of that era, like most periods in history, didn’t comprehend the idea of debt load, wealth, liquidity, or any deeper financial concepts. They saw ‘things’ and that equated to ‘rich’. Later in life, as the nuances of money became better understood, new words to describe a financially affluent status entered into the lexicon. The first is ‘comfortable’, as in ‘they are comfortable’. This kind of meant the same thing as ‘rich’. They have nice things that we don’t have with the caveat that it was understood that the people who were ‘comfortable’ still had to have at least one member of the household work. In addition to comfortable, there was the word ‘wealthy’. ‘Wealthy’ is a word that wasn’t used often, but it’s just as important a designation as ‘rich’ or ‘comfortable’. Wealthy, really independently wealthy to be more precise, meant the people being spoken about didn’t have to work.
So to continue with answering the question of “Should becoming rich be your goal?” We need to define ‘comfortable’ and ‘Wealthy’ a little more clearly. This is because the problem with these designations is that there are no hard and fast rules. Everything is a variable based upon your own version of normal i.e. what is acceptable to you as average and above average. I’ve often cited that many people in our old neighborhood have made the comment that my wife and I, both of whom have incomes hovering right at the american average, are ‘rich’ but only because we have chosen a life of no debt and we liked to maintain a buffer. We have cash to buy things we want, so we typically have nicer things compared to the neighborhood status quo. We get them when we want, and when we want to get them is usually when we can take advantage of a great deal. This is a virtuous cycle. The better deals helped us maintain the buffers and get more nice things. That was the old neighborhood where, admittedly, the status quo was one of no cash reserves and continual bills that were due. Consequently the strange people up the street who could go out anytime and get the car fixed or buy the new gadget dujour were ‘rich’.
The point of reiterating this story, is that we have to look at the definition of ‘comfortable’ and ‘wealthy’ through the lense of ratios. Comfortable, as the word implies, should convey comfort. Liabilities should be minimal and where they exist, assets should easily exceed liabilities. Or more succinctly, carrying a big mortgage for the tax benefit shouldn’t be an issue if available cash is significantly higher than what is owed on the mortgage. A hospital based doctor with 200K in the bank, but a $1.2 million mortgage and leases on everything they own is not what I would consider comfortable. I don’t care if they live in a million dollar McMansion, have an exclusive golf club membership, and have traveled the world. I know one surgeon with an income of half a million a year who got fired from a practice after it was bought out, and until they landed on their feet, they were very uncomfortable! A maintenance worker at that hospital with $50K in the bank, total monthly bills of 2,000, and no mortgage or other payments would be very ‘comfortable’. The one caveat of this is if the maintenance worker aspires to a better life with nicer things. Typically if they do, they don’t have the two years of income in the bank because they are using a bunch of their liquid assets to buy stuff. This, admittedly, is one of my challenges, I like stuff. Usually though if you have your big bank account you don’t want to go on the world cruise or the annual international vacation. A semi-annual trip to stay with relatives in another state is good enough.
Wealthy on the other hand to me means not having to work. There is enough wealth where you can maintain your quality of life for the rest of your life inclusive of healthcare. Again it’s a variable based upon perceptions of acceptable quality of life. A couple in a modest paid for home in a rural community with enough income to pay their bills and buy the things they want (including giving), would be considered wealthy by their peers in that neighborhood who still have to work to maintain the same lifestyle. It doesn’t matter if the home cost $50,000 and the income approximates to $30,000 / year. I think this is why a paid off home mortgage has become the modern American Dream. It’s a major step towards ‘wealthy’ status for every person who is a homeowner. If someone has an out-sized mortgage compared to their income, we don’t say they are house wealthy, we say they are house poor.
As a side note, Is it any wonder why there is so much debate over social safety net services? If your quality of life needs are met via a disability check and medicaid, it’s a fast track to a twisted variant of wealthy. I don’t intend to go down the rabbit hole of the pro’s and con’s of its existence, but clearly this ‘good enough’ status is why so many are willing to accept it as a permanent and even aspirational reality.
What is a reasonable goal?
What should you aspire towards? I think if you are reading this then you aren’t going to use the word ‘rich’. Your wise enough to understand that rich is a word that’s got such vague connotation it’s useless as a descriptor. The goal should then be to either aspire to be comfortable or wealthy. Let’s look at wealthy first.
Putting aside the disability crowd, the wealthy, the truly wealthy, no matter if it’s millions, hundreds of millions, or billions typically didn’t start out with the intent of being wealthy. I’ve known a few multi-millionaires in my day. Generally speaking they are the champions of their ‘thing’. Their thing can be a service, a widget, or a technology. It’s usually the most boring thing you ever imagined. It could be a circuit, or a voltage regulator or a chunk of metal uniquely designed for a very niche market. They usually invented their thing, or at least invented some improvement in the design or distribution of it. This is why they are the champion. In their minds, their identity is tied to their success with their thing. In the same way Tiger Woods wants to be the best golf player he can be, and possibly in the world, they want to be the world’s voltage regulator expert. Maybe they pride themselves in making the best dump truck bodies in the market. The nearly incomprehensible levels of wealth they own came as a matter of sound business practices on the way to their perfection with their thing. In the case of Corporate CEO’s, even they aren’t looking for wealth. For the most part they generally like to play ‘the corporate game’ more than they care about the wealth. I’m sure there are some people who are involved in business just for the sake of wealth, then as soon as they cash out they retire to some island and are never heard of again. I don’t know any personally and I can’t help but think they are the minority. The point is even the wealthy don’t aspire to be wealthy as the end goal. That is usually a side benefit of the end goal of ‘growing their own business’ or ‘making the best widget in the industry’. The quest for wealth is just a distraction for them. It’s their passion that propels them.
Does this mean that being wealthy isn’t something you can aspire to be? I would answer it’s still possible. It’ll just take a long time. If the root aspiration is being wealthy, and wealthy is defined as never having to work again for the rest of your life at your chosen quality of life, then all you need to do is figure out exactly what your quality of life is, and target that. Once you hit that number, you are set. As an example, let’s say you want 120K a year. This is about 1.5x the average working salary for a two wage earner household. That would put you at a significantly better than average quality of life. You wouldn’t be able to afford your own island, but maybe you could have a condo or a small house near, but maybe not directly on, the beach. You could eat out every night if you wanted and take a couple of vacations a year. Using the trinity study methodology of long term investing, it would mean you would need to have about three million dollars invested (or four million if you want to be more conservative) to generate the income. That’s cash on hand, so in truth you’d need to earn six to eight million before the taxes are taken out. Six to eight million sounds a lot like ‘rich’ but in truth it’s a cash equivalent of only about half again as wealthy as a dual income household. It’s also feasible to earn over the course of a working lifetime. If you worked from twenty years of age to sixty and each member of the working couple put away $1500/month for the duration of their working years, then yes, they can retire wealthy. This calculus doesn’t include social security, inheritances, or other potential income streams.
Feasible, unfortunately, is very different than ‘probable’ or ‘likely’. No matter what your financial independence bogie is, most twenty year old’s don’t start putting a massive chunk of their income into investments for a payout forty years down the road. I met a worker today who is in their waning years and although they are intelligent, college educated, and have been a hard worker throughout their life, they have nothing but social security to live on now. This is because ‘life’ happened to them and they simply never were able to prioritize their own retirement savings. I’ve commented on the solutions for this systemic problem, but the salient point here is that long term aggressive investing is far from the norm. Even though becoming wealthy by the definition of not having to work is a technical possibility, it’s not a reasonable thing to aspire to because for 99% of the population, by the time they learn what it takes, it’s too late. Kids and careers, and other lifelong commitments get in the way of having that income.
That leaves ‘comfortable’ as a target. Comfortable could work. You’ll have to choose a methodology to get there. You can go with financial offense or defense to achieve the goal. Even though it’s very difficult to do it, a combination of the two, if achieved, would get you there that much quicker. With both, liabilities must be eliminated wherever possible. This is very difficult to do when in the child rearing years but thankfully they don’t exist forever. If you want to work you can’t get out of things like daycare easily. If married or in a long term committed relationship, you’ll have to convince your spouse or significant other that eschewing the status quo of a mortgage and living in a completely paid for smaller/older/eclectic residence is more important than perception of status. If it’s offense, you’ll have to build that buffer up substantially as you jump from position to position. Fortunately, comfortable can come much earlier in the work life cycle. Imagine a couple that spends $5,000 on one or two acres of property in the middle of nowhere, but where commuting to a metro area or telecommuting is possible. They spend another $20,000 building a three car garage with a one or two bedroom apartment on top of it. Two workers, even on a modest income can save up or pay off $25,000 very quickly, maybe within a year or two. Now they own what can eventually become the garage / workshop and guest house. The next step is to spend the next five to seven years paying off a moderate sized house. By the time the couple is in their early 30’s they have a mortgage free home. Assuming no other debts, as they increase their incomes over their career, with no mortgage, it’s easy to build up a couple of years living expenses in cash. Yes, one or both will always have to work, but they definitely qualify as comfortable. The real beauty of this that it can be done at any time in one’s lifetime. It’s a ten year process, give or take, no matter where you are in the income to debt scale. Maybe a bit less if you have some sort of equity in your home or other liquid assets. Dave Ramsey built a multi-million dollar business out of teaching people how to get out of debt and modify their lives to essentially become comfortable.
I don’t think being independently wealthy is reasonable as a goal. It’s too much of a crap shoot. Even if you choose the long term guarantee of putting away most of your money from your earliest working years, it will take your entire life. It’s basically a really nice retirement. In the end it’s a little sad to say “the odd’s are no matter how hard you try, you’ll never be independently wealthy in your middle years” but I can’t bring myself to encourage anyone to set a goal that is nearly impossible. Goals should be attainable. That’s why it’s the A in SMART goals methodology.
On the other hand it is definitely attainable to be ‘comfortable’. Like the earlier described path of building enough wealth so as to not have to work, it takes sacrifice and dedication. Fortunately it’s not nearly as much of a commitment nor does it take as long to achieve ‘comfortable’ status. It’s also reasonable to advise someone to bust their behinds for a decade and then spend the rest of their life enjoying the fruits of that sacrifice. We say the same thing to kids when we advise a high schooler to continue on through a masters degree.
So the answer is no. Becoming rich, aka independently wealthy, should not be your goal, but being comfortable is a pretty good substitute goal. You may not be able to stop working but you’ll definitely be able to stress less about losing that job with a fat bank account and no bills. As a bonus you can afford whatever luxury is the modern equivalent to a second phone line for the kids which may even reduce stress in your life. If you think about it, a comfortable life with no debt, good buffers, and less stress it’s a bit like a Godiva chocolate covered New York cheesecake. You can describe both as highly desirable, tantalizing and even rich!
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