What Actually Is Wealth?
What Actually Is Wealth?
Ask 100 people to define wealth and you’ll probably get 100 different definitions. It seems that wealth means something different to everyone. To some, wealth is having good friends and being well-liked, to others, it is close family ties, to still others, it is a loving relationship, good health, education, or the feeling of being appreciated. One might say that wealth is having an abundance of whatever is important to you. We won’t argue or disagree with that definition, but since this article is about financial independence, we should define wealth as it relates to your financial condition.
One reason so many people think of wealth in subjective terms is that to most people the idea of becoming a millionaire is so far beyond their imagination that it seems like a dream. Why? Because they have been conditioned by society to think in terms of “earning a living”. When they sit down with a calculator and figure out that they would have to “earn” at say, $13 per hour, 40 hours a week, 50 weeks per year, for 40 years just to “earn” $1 million dollars, they see the goal of becoming a millionaire as impossible. Many working people don’t earn $13 per hour on their jobs and that’s before taxes. When they have to pay living expenses from what’s left over after taxes, they struggle just to exist.
Even people who make $50-$60 per hour find that becoming a millionaire is a daunting task. Although this seems like a good wage, after it is reduced by taxes they would still have to set aside more than 30 percent of their income to save $13 per hour. Practically, no one is willing to do this, which is why so many people define wealth in subjective terms that have nothing to do with money. Not believing it’s possible to become wealthy financially, they define wealth in other ways, which can’t be measured. But for those who want to reach financial independence, wealth is measured in terms of money or the monetary equivalent of assets that generate money: in other words, things that can sustain and improve your standard of living.
When we talk about wealth, a lot of people get nervous because they view money as the root of all evil. In fact, money is not the problem, it’s what some people do in pursuit of money or do with the money after they get it that causes problems. Money is not the root of all evil, it is just a tool, a common means of exchange. What causes problems are greed, laziness, dishonesty, deceit, fraud, corruption, cheating, and other human flaws that lead to the unscrupulous quest for money.
Building wealth is not about working for money, it’s about money working for you. Wealth is not measured by what you own: it’s measured by the degree to which what you own can enrich your life. In other words, wealth is an income stream: an income stream for which you don’t have to work. You may think you want to be a millionaire, but being worth a million dollars is far less important than the income a million dollars can generate. Let’s take this example:
Suppose you have a million dollars worth of gold locked in a safe deposit box at your bank. Technically, you are a millionaire, but what is the gold doing to enrich your life? Suppose you took the gold out of the vault, turned it into money, and used the money to buy 10 houses costing $100,000 that would rent for $1,000 per month each. Now you would still be worth a million dollars, but the million dollars would be generating $10,000 in income per month, every month for the foreseeable future: an income that would grow as inflation pushed prices up. In this scenario, can you see your invested money could enrich your life every month without depleting your million dollars? On the other hand, if you keep the gold locked in the vault, inflation would gradually erode its buying power, and other than the satisfaction of knowing you had it, the million dollars would not enrich your life at all.
With this in mind, let’s define wealth as an income stream for which you don’t have to work. When most people see others living in big houses, driving luxury cars, wearing expensive clothes, and belonging to a country club, they think these peoples are wealthy. Maybe yes and maybe not! The true meaning of wealth is how long these people can sustain that lavish lifestyle if they suddenly can’t work and earn money. Let’s take a look at these contrasting examples.
John owned a popular restaurant. John drove a new Cadillac, lived in a beautiful house, and had a ranch where he raised show horses. His child attended an expensive private school. He also owned a big motor home and had all the appearance of wealth. John always paid his suppliers promptly and they developed a good relationship. One of them is Lee. They took hunting and fishing trips together. When they took trips together, John always had a big roll of cash in their pocket and made it a point to let Lee knows how well he was doing. Lee likes spending time with John because he was impressed with John, and if the truth be known, even somewhat envious of John’s success. He hopes to learn from John and that some of John’s good fortune would rub off.
One day, Lee received a call. John has been taken to hospital, suffering dizziness and a headache. He gathered a few more friends and rushed to the hospital, but by the time they arrived, the doctors had already sent John to intensive care. He had suffered a massive brain aneurism and his outlook was doubtful. Although John was only 48 years old and had a wife and small child, he failed to make it through that night and his death set in motion a tragic turn of events that had a lasting impact on Lee.
Visitors at the funeral home and attendees at his funeral were united in their expression of sympathy to his family, and everyone commented that at least his financial success would assure they would be cared for after his death. But as the days passed following his funeral, John's darkest secret began to surface. He has spent everything he made as he went through life, and in death, he left his family in debt.
His family ended up having to sell the restaurant, the ranch, the motor home, the Cadillac, and the family home. Even the life insurance they thought he had carried had been canceled. For Lee, this was not a lesson in greed, corruption, or any of the other human flaws that lead to unscrupulous quests for money. John was a man who earned his money honestly and paid his debts timely, he just failed to plan for his future.
This is the characteristic that keeps ordinary people ordinary and discovering it provided Lee with a lesson he never forgot and a lesson that played a big part in developing the millionaire mindset.
Throughout their friendship, John always spent more than Lee, but that was because he was spending all he had. Lee just didn’t know that at that time. On the other hand, lee was more frugal and continued to invest part of his money in assets that would provide future income. That meant he did without some of the things John was buying, but his assets and income were steadily growing. Besides construction, Lee diversifies into real estate. He made it a point to invest at least 20 percent of his income in assets that would produce passive income, income for which he didn’t have to work. John never enjoyed any passive income.
The shock of learning that John had left his family in a desperate state of affairs strengthened Lee’s view of planning for the future. Although he was still young and believed that living well today was important, Lee also understood that unless he planned for his family to be cared for if something should happen and he couldn’t work, or planned for himself if he should live to a ripe old age, he wouldn’t be able to enjoy the peace of mind he wanted. This kept him investing 20 percent and more of his earned income into his business, plus investing a few hours each week of his spare trying to find and structure real estate deals that would add to his passive income.
One important step he took was to set up a special bank account into which he deposited all of his income and paid all of the expenses from his rental properties. In the beginning, this account contained very little money because the new purchases he was making had little cash flow after expenses. Gradually, however, as funds began to build up in this account, instead of taking the money out and spending it, Lee would reinvest it by purchasing more income-producing properties. Lee understands the power of real estate investing and has set a target of $50,000 a month in income from property investing. He knew if he could reach this goal, he can retire from active work with a standard of living far beyond anything he had ever imagined possible.
Many people believe that wealth is having a good job and a high income. As you can see from these contrasting stories involving John and Lee, there is a big difference between earning a living, the way we spend our money, and building wealth.
That’s all for now, my friends. See you all in my next article.
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