How do we define and measure wealth for ourselves and for others?
Is it merely through the number of dollars we have accumulated throughout our lifetimes?
Does it have anything to do with the amount of possessions we have, the size of our house
or how prestigious our cars are?
Or do we measure wealth through some other means entirely?
In today’s video, I’m going to be going over 3 commons ways I see wealth defined as
well as how I personally choose to define it for myself.
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So the 3 commons ways I’m going to be talking about in today’s video is wealth as measured
by dollar value (or whatever currency you happen to use), wealth as measured by the
duration for which you can sustain your lifestyle without continuing to earn an income, and
wealth as measured through the “Wealth Trinity” as discussed in MJ DeMarco’s book “The
Millionaire Fastlane.”
So the first way that we often define wealth is through sheer raw numbers.
If you have $10 million in your bank account we could pretty safely assume you would be
considered wealthy by a large portion of the population, but with only $10 to your name
maybe not so much.
For the longest time having a net worth of $1 million dollars was considered to be wealthy
and was for many a goal to strive for, and still is to a certain extent.
However, the downside to viewing wealth purely through the lens of raw dollar values is that
depending on the lifestyle of the individual in question $1 million may be an extraordinary
amount of money that can fund their lifestyle and then some for many, many years to come,
but for others it might not be able to last them a decade under their current lifestyle.
Location also plays a large role, I mean $1 million dollars living in New York City or
Los Angeles isn’t going to get you quite as far as that same $1 million will in Minneapolis.
So while using a raw dollar value approach can give us a general idea of someone’s
wealth, it can also be misleading unless we also have more information to go along with
it.
The second way that we often define wealth is by figuring out how long that money can
last us if we weren’t able to or just chose not to continue generating an income.
This is often the approach you see when retired people or their early retiree counterparts
are discussing how they managed to retire in the 30’s or 40’s.
They figured out that they would be able to live off their savings for however many years
they figured they’d need in the case of the retired person (or just for as long as
they live in the case of the early retiree).
This approach of basically asking yourself “how many days forward can I expect to live
this lifestyle on this amount of money” solves the primary issue I was talking about
with the raw dollar value approach because it allows us to adjust for differing levels
of lifestyle and come to a more uniform number.
Someone living in New York and spending say $100,000 a year with $1 million in savings
would have accumulated 10 roughly years’ worth of wealth for themselves.
Whereas someone living in a lower cost of living area such as Minneapolis may only be
spending $50,000 a year.
Meaning, assuming their savings were the same of course, they would’ve accumulated roughly
20 years’ worth of wealth for themselves unless you want to consider things like inflation,
and rate of return if they invested that money somewhere (which of course we would in reality,
but I’m just trying to focus on the pros and cons associated with the definitions today).
The point is this approach gives us a more uniform way of analyzing the wealth of ourselves
and others than just looking at the net worth figures of each individual does.
However, what this approach fails to do is take into account things other than money.
Some may disagree with me here and that’s fine, but I personally feel that a person’s
wealth incorporates more than just the amount of green pieces of paper they have accumulated
or even how long they can make those pieces of paper last.
While that is an important part of the equation it is not the entire equation, which brings
me to the third way that we often define wealth.
The third way we often define wealth is through what MJ DeMarco calls the “Wealth Trinity”
in his book “The Millionaire Fastlane.”
In the wealth trinity one’s wealth is measured, not necessarily by how much money they have
(at least not directly), but by how strong your relationships are with friends, family,
and your community.
How healthy and vibrant you are as an individual.
And how much freedom you have in life.
In the book, these are referred to as the three F’s: Family, Fitness, and Freedom.
And I personally like this definition of wealth the most out of the three.
When I look back at the richest moments of my life, the memories and moments I cherish
the most, none of them have much to do with money (again not directly at least).
They usually have to do with late game nights at a friend’s house, or those rare trips
with my family growing up, or going out west and visiting a bunch of national parks for
the first time in my life.
Certainly I couldn’t have done much of that stuff without money since, at the very least
food, gas and some form of lodging would’ve been needed at some point during all of those
experiences, but my life wouldn’t have been as rich, and I wouldn’t have been as wealthy,
had I just left all that money in my bank account.
Now that’s not to say that saving money isn’t a good idea or that it's unimportant,
because of course, it’s very important, just not for the mere sake of saving.
It’s important so that you can develop a passive cash flow that gives you the freedom
to choose what you want to do with your life.
It gives you the choice to be able to retire or maybe go to part-time (if you are following
the coasting financial independence path to retirement).
It gives you the choice to maybe take some extra days off beyond the vacation that your
company may give you so that you can go on an extended vacation with your family.
You get the point, savings gives you that freedom of choice to fill in the blank here.
And it’s those freedoms of choice, time, and location that, when used properly, allows
you to best strengthen those other aspects of the wealth trinity and become a truly wealthy
person, both with money and beyond it.
And I think that’s a much more comprehensive and accurate definition for wealth and it’s
the one that I use… at least until I find a better one to replace it with.
Which leads me to my question of the day.
How do you define wealth?
I know that there are dozens of definitions that I didn’t cover in this video, and for
all I know one of them that’s even better than any of these three has escaped my attention.
Let me know in the comments section below, I’m really interested to see how others
view this question.
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