Who do you consider rich? At what income are you considered rich? For now we'll put aside the platitudes that say you're rich if you have your health, a happy caring family, close supportive friends and many interests. Of course these are the reasons we live for and money can't buy those treasures. But as Spike Mulligan once said “Money does bring you a more pleasant form of misery.”
These characteristics of the vast majority of millionaires in the United States may surprise you:
- Live in a less than $ 400,000 house.
- More likely wearing a Timex watch.
- Pay $ 15 or less for a bottle of wine.
- Never paid more than $ 400 for a suit.
- More likely to drive an Acura than a BMW.
- Spend little on trendy brands and luxury items
Figures from the Tax Policy Center say if your annual household income is $ 107,628, you are in the top 20% of income earners. If you exceed $ 148,687, you are in the top 10%. The top 5% earn over $ 208,810. And if your household income is over $ 521,411, congratulations. You are one of those “1% ers” and likely demonized by those who view hard work and risk-taking as a matter of luck or good genes. However, like a company, your personal balance sheet should be the determining factor. If you make $ 200,000 a year it does you no good if you're spending $ 210,000.
You may in fact just appear rich instead of actually being rich.
Take for example the recent news about NBA legend Alan Iverson. Shockingly, a man who before age 35 had amassed a fortune more than the average person will see in a lifetime had blown it all. To quote from the article: “Iverson blew through his money at an alarming rate on gaudy jewelry, expensive cars, and other frivolous purchases. In 2012, a Georgia judge garnished his wages to satisfy a $ 859,896.46 debt to a jeweler.”
Huh? Almost a million dollars to a single jeweler! Here is a man who not only looked rich but actually was rich. But because the desire to look rich overwhelmed him, he is now begging for change on the street. He does stand to get $ 30 million from a trust, but not until age 55. It will be interesting to see if he learns his lesson, if he can survive until then. My guess is that $ 30 million will be gone before he reaches “official” retirement age.
This is why net worth is a far better gauge of true wealth than income. The Federal Reserve Survey of Consumer Finances indicates a net worth of $ 415,700 puts you in the top 20% of households. You are in the top 10% if your net worth is $ 952,200. (Dr. Thomas J. Stanley – author of The Millionaire Next Door – says that one in eight American households has a net worth of $ 1 million or more. That's close) If your net worth totals $ 1,863,800, you are in the top 5%. And if you have a household net worth of $ 6,816,200, ta daa- you are in the top 1% … and possibly frowned upon by redistributionists who resent folks that live beneath their means, save regularly and handle their financial affairs prudently.
Most millionaires are quite the opposite of being big spenders. They spend far less than they can afford on all commonly owned assets. The want to-be's, on the other hand, (people with average or higher than average income but little net worth) are merely “aspirational.” They buy expensive clothes, top-shelf wines, luxury cars and often more house than they can comfortably afford.
It's ironic the very same thing that makes them APPEAR rich prevents them from ever BEING rich.
How then do you become rich if you aren't currently? The basic formula is pretty simple: Maximize your income (by upgrading your education or job skills). Minimize your liabilities (by living beneath your means). Save the difference in an IRA or 401K (I know easier said than done.) And follow proven investment principles.
Sure you must learn to be frugal. But eventually becoming financially free, to be able to do and go wherever you want, not have to depend on a bonehead of a boss or the federal government is what I consider rich. What a feeling.
Some people refuse to change, but the bottom line is clear: If you want to be rich, you have to stop appearing like it and actually start living like the many real millionaires you won't see on TV.