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How do you know when you are rich enough?

| June 13, 2016
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How Rich Are You?The Oxford Club, a private, international network of investors and entrepreneurs, has a singular mission: To grow and protect the wealth of its members.

So I love that its chief investment strategist, Alexander Green, is famous for asking the question that I often hear my clients ask: When are you rich enough?

Stop reading this article for a minute, and ponder this question for yourself. Pull out a pad and pen, or type on your favorite electronic device the three things that would make you feel rich enough. 

Here are my three responses. I think you are “rich enough” if you:

  • Are in good health,
  • Have a great family and close friends, and
  • Enjoy many interests.

While some are convinced that a person’s wealth can be determined only by their income, I would argue that you determine your level of wealth by looking at a balance sheet of your life—not just an income statement.

And if having a lot of money is important to you, then pay attention to you net worth. I believe that it is a far better measure of how rich you are than annual income, though a high income certainly helps.

Let’s look at the numbers.

According to the Tax Policy Center:

  • If your annual household income is $107,628—you are among the top 20 percent of all income earners in America.
  • If your income exceeds $148,687 you are in the top 10 percent.
  • Making $208,810 puts you in the top 5 percent.
  • And, if your household income is $521,411 or more—congratulations! You are in the top 1 percent of wage earners.

A recent survey on consumer finances by the Federal Reserve shows:

  • A net worth of $415,700 puts you in the top 20 percent of American households.
  • If your net worth is $952,200, you are in the top 10 percent.

These findings correlate with research by marketing professors Thomas J. Stanley and William D. Danko, who found:

  • One in eight American households have a net worth of $1 million or more.
  • If your nest egg totals $1,863,800, you’re in the top 5 percent of all households.
  • And if your household net worth is $6,816,200, you are in the top 1 percent.

So if you’re not “rich” now, how do you get there? I realize it is easier said than done, but follow these three approaches:

  • Maximize your income (by upgrading your education and job skills).
  • Minimize your outgoing expenses (by living beneath your means).
  • Save the difference as much as you can.

Most wealthy people are not big spenders. In fact, quite the opposite is true.

According to extensive surveys by Dr. Stanley, the most productive accumulators of wealth spend far less than they can afford to on homes, cars, clothing, entertainment, vacations, etc.

Although some people have a higher-than-average income, that alone does not make them rich. Many aspire to be wealthy but don’t achieve that goal for several reasons. They often buy expensive clothes, top-shelf wines and liquors, luxury cars, and all kinds of “bling,” and they often purchase more house than they can actually afford to.

Their problem, in essence, is that they’re trying to look rich, but that very strategy actually prevents them from ever truly becoming rich.

It may surprise you, but the vast majority of wealthy people in the United States:

  • Live in a house that costs less than $400,000
  • Are more likely to wear a Timex watch than a Rolex
  • Generally pay $15 or less for a bottle wine
  • Have never paid more than $400 for a suit
  • Are more likely to drive a Honda than a BMW
  • And, they spend very little on prestige brands and luxury items

Clearly, they are frugal. But they also report being very happy because they are not dependent on their families, employers, or the federal government for money. What a great feeling!

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