27 August 2007 4 Comments Print This Post  Email This Post

How do you know if you are rich? We strive to become rich, but when do we know when we’ve actually reached that destination? I looked up the term rich on dictionary.com but the definitions were not much help. The best definition I found was this:

having wealth or great possessions; abundantly supplied with resources, means, or funds; wealthy: a rich man; a rich nation.

How should we define this commonly tossed around word in real terms? Most of us would likely measure this term by looking at someone’s net worth. A person’s net worth is their assets minus their liabilities. Basically it’s all the money to your name. Perhaps you would also look at income, because if someone makes more money than another, they should be richer right? I don’t think that is the case. A lot of high net worth and high income individuals are not as rich as lower net worth people for many reasons.

What Does It Mean To Be Rich?

We must first define this broad term. Our dictionaries have many different definitions for this term, but the common word that comes up is abundance. To have a lot of resources, means, or funds available to you makes you rich. I will add another three significant terms to that; options, freedom, and opportunity. If you are rich, you have options. You have choices that others do not have. You are financially free, meaning you can choose how to go about your days without worry about how you will pay your bills. You are not stuck in an endless maze of a job trying to make ends meet. You can pursue different opportunities without compromising your lifestyle. I can safely say that if you don’t have to work every day to maintain your lifestyle and you have the choice to fly around the world instead, you are rich regardless of your income or net worth.

Rich is Relative

Rich is not measured in numbers. Your net worth should not determine how rich you are. It should be a scorecard for overall wealth, yes, but it’s not the determining factor. Everyone’s situation is different and a lower income or net worth individual can be richer than a person of higher income and net worth. This is because rich is a relative term that should take into account local living conditions, standards of living, and individual preferences.

Lets say a software engineer in Silicon Valley makes $90,000 a year after taxes and he lives in a $800,000 house. Due to diligent saving over the years he has about $400,000 in equity with a total net worth of $500,000. His total cost of living is also slightly higher than other parts of the nation because things cost more there. Although he has a high income and net worth, he must maintain that income in order to pay for all the expenses of his lifestyle and living costs. As long as the income stays steady and he continues to work, the lifestyle is maintained. If an emergency came up and he is somehow unable to work, his family may be in a heap of trouble. Unfortunately the aftermath of the dot-com bubble claimed many victims because everyone was depending on their income to maintain their lifestyles.

Another software guy, who lives in Atlanta, GA for the sake of example, makes only $40,000 a year after taxes. Because of diligent saving over the years, he has a $200,000 house which is all paid off. His total cost of living is relatively cheaper than other parts of the country. Our Atlanta guy has a total net worth of only $250,000. Because his house is paid off and his total cost of living is low, he has a lot of money left over each month which he can save, invest, or buy whatever he wants. He has also contemplated taking a year off for travel and eventually starting his own business.

I would argue that in those two above situations, the man living in Atlanta is richer than the Silicon Valley guy who has a higher income and net worth if all factors remained the same. The key differences in my analysis are options, freedom, and opportunity. The Atlanta engineer has the freedom to invest, donate to charities or pursue opportunities and dreams. Our Silicon Valley guy has but one choice, which is to maintain his level of income if he wants to maintain his lifestyle. If he had aspirations of starting a business or trying new careers, those days may never come. What fun is that?

Become Rich

You can be richer than someone that has a higher net worth. I urge you to pursue abundance and choices in life rather than strictly numbers, which we are sometimes trained to do. Of course it’s nice to have a high net worth, but don’t forget to look at different options in lifestyle. Personally, I decided it was not necessary to stay in the expensive city I grew up in because the housing and cost of living is extremely out of whack with income levels. If I were a millionaire here in San Francisco, with a net worth of exactly $1 Million, I may still be living paycheck to paycheck because my house costs $900,000 and I overpay for everything here. Thats assuming someone gives me $1 Million too because I don’t know how I would become a millionaire on my own here if most of my income was paying for living expenses. So unless I hit the lottery, I’ve decided to leave so I don’t work like fool all my life for nothing. I’m moving to the Houston TX area where my house will cost around $180,000. The moment I make this move, I am instantly richer because I’ll have options and opportunities. Freedom will soon follow if I save diligently and invest intelligently.

Consider all your options from places to live, to the car you drive, to the lifestyle you want to live. Remember that a high net worth along with high maintenance doesn’t make you rich. It’s no wonder why some big stars are miserable and they go bankrupt even though they make tons of money and have high net worths. At the end of the day, you can’t take your net worth with you to your next life, so don’t focus on that. Focus on living a life of abundance, along with options, freedom and opportunities and you will become a very rich person.