What is Wealth? Wealth is Time and Money

What is Wealth? A Modern Perspective

Is it how much money you have, how big your house is, how nice your car is, or how often you can go shopping? This is what comes to mind for many when they think of what wealth is and who has it. I recall talking to a friend about a mutual acquaintance who has a nice house and spends a lot of money. She said, “They’re rich!” Little did she know, they were borrowing money from me to pay bills – that’s not rich. Many will see those who spend a lot as being rich and those who do not spend a lot as being poor. The next conclusion is that, being that they want to be rich, they should spend a lot as well and show everyone how rich they are! Understand what wealth is so that you do not make this critical error in judgment.

The Definition of Wealth

Wealth is obviously not how much you spend, but not just about how much money you have either. It is also about how you make money; which essentially determines how much time you have to spend on the finer things in life. I like to define and quantify wealth as follows:

Wealth = Your Standard of Living (e.g. in $/month) x Duration You Can Go Without Actively Working (e.g. in months)

Although in dollars, the result of the equation is how wealthy you are; not how many dollars you have or what your net worth is. This equation may be simple, but contains a lot of wisdom. Think about how this applies to your situation and to those around you to see the truth within.

Woman Working Hard at Laptop - Frustrated, Stressed out - Earned Income - High Job Dependency

High Standard of Living, but High Job Dependency

If you have a high standard of living, but are very dependent on your job and your job is very dependent on you, this would indicate that you are not particularly wealthy. Many with decent-paying jobs consume nearly all of their cash flow on a nice car, nice home, parties, vacations, etc. They may appear to be wealthy, but they are one or two setbacks away from going broke. This is why many refer to a job as the acronym JOB – Just Over Broke.

People in this category are typically stressed about their financial situation and work long hours to keep up with their standard of living. Ironically, this stress encourages them to spend more lavishly to try to make the work feel worthwhile, only to find themselves needing to work even harder to pay their bills – it is a vicious cycle. Ignorant observers may take notice of this predicament and conclude, “This is why I don’t bother trying to be rich – I would rather be happy, unlike him.”, little do they realize that this is not true wealth.

An exception to this may be if you love your job and you do not end up involuntarily losing it (e.g. illness, injury, being laid off, etc.) or getting into financial hot water over some other setback (e.g. lawsuit, investment losses, etc.).

Man Sitting at Home Working on Couch in the Dark - Low Standard of Living

A Lot of Money, but Low Standard of Living

Conversely, if you have a lot of money, and thus can go without working for quite a while, but that comes at the cost of having a low standard of living, you are not particularly wealthy either. I have experienced this first hand – I once sold a nice home to build capital by living with a family member. Although this allowed me to accumulate quite a bit of money, I can assure you that I was not wealthy at that time because this came at the expense of my standard of living.

Wealth vs. Net Worth

Net worth is often confused for wealth, but these are different. It’s generally wiser to focus on building your wealth rather than your net worth. While the wealthy typically have a high net worth, those with a high net worth aren’t necessarily wealthy. Wealth gives you opportunity today, whereas net worth gives you opportunity tomorrow.

Having a high net worth is great, but not particularly useful except perhaps to yourself when you are old and retired or your heirs when you die. Cash flow is much more important than net worth when it comes to your lifestyle because your net worth is of little value until it is realized in the form of cash flow. Keep this in mind as you make financial decisions.

Ask yourself whether you’re building wealth (e.g. starting a business) or net worth (e.g. contributing to an IRA while you’re young). These may seem to be similar, but the time component shouldn’t be ignored – if you’re young and diverting most of your net income to your 401(k), IRA, HSA, home equity, etc., your standard of living will not benefit until you are able to convert these assets into cash flow. In addition to deferring your cash flow, such activities will deprive you of capital that you may be able to use to invest in higher-yielding assets that raise your standard of living in the short term (e.g. business, real estate, private equity, etc.).

This isn’t to suggest that you shouldn’t engage in such net-worth-building activities, just to illustrate the difference between wealth and net worth. If you fail to understand this, you may find yourself in a situation where you need money, either to get out of a jam or for a great opportunity, only to find that money locked away.

True Wealth - Gold Coins Stacked and Growing

True Wealth

Being truly wealthy requires both components of the equation: money and time. You may know someone who fits this description – perhaps the president of your company who spends half of his time mountain-biking while his checks continue to roll in, and see the difference between their true wealth and the phony wealth that so many others want you to see.

True wealth typically comes from one or more of the following. If you are struggling to build wealth, it is likely that you have none of these:

  1. Businesses that can operate in large part without your involvement
  2. High-yielding investments such as real estate and private equity
  3. Other passive income (e.g. royalties)

There are two primary reasons for this:

  1. There are only 24 hours in the day and only one of you. If you are unable to find a way to make money that does not require your full attention, your ability to build wealth will likely be very limited.
  2. The tax code favors business and passive income (see The Three Types of Income)

You are encouraged to internalize the true definition of wealth and reflect on:

  1. Your situation and how what you do and how you make money explains how wealthy you are
  2. What you can do to build true wealth

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