How Much Does It Take to Be “Rich”?
The results of a recent YouGov survey show that most Americans think you need to make $100,000 per year to be considered “rich.” Assuming you weren’t one of the people interviewed for that survey, does $100,000 a year sound like wealth to you? What if someone makes less than six figures per year? Can they still be considered wealthy? How can someone with a goal of getting rich know when they’ve finally arrived?
What does “rich” even mean?
Here’s the challenging thing about defining what it means to be rich or wealthy—it’s all relative. In a recent article for CNBC, reporter Kathleen Elkins shared that, according to the 2018 Global Wealth Report, “If you have just $4,210 to your name, you’re better off than half of the people around the globe.” That report went on to show that anyone with a net worth of $93,170 or more ranks in the world’s wealthiest 10 percent. How about that? It turns out wealth has little to do with your income after all.
Yes, earning a lot of money can help you build wealth, but there’s more to it than that. We’ve all heard stories of individuals who made massive amounts of money yet wound up broke and bankrupt. At the same time, there are many examples of ordinary people who earned average salaries and somehow managed to retire with extraordinary wealth and financial stability. When you analyze their stories, you find that those who were successful focused less on their income and more on their net worth. If you want to “get rich,” you’ll need to make your money work for you instead of the other way around.
Net worth is the key to lasting wealth.
Maybe “net worth” is a new concept for you; maybe it’s not. Either way, let’s define the term for the sake of clarity. Credit Suisse, the research institute that compiled the Global Wealth Report mentioned above, defines net worth as “the value of financial assets plus real assets (principally housing) owned by households, minus their debts.” Simply put, your net worth is the difference between what you own and what you owe. By this definition, it’s easy to see why income is only part of the wealth equation. You might earn $250,000 per year, but if your debts and payments outweigh your income and assets, you’re just broke at a higher level.
Do you want to get rich? Start with these simple steps.
- Follow a budget.
Whether you make minimum wage or a CEO’s salary, it’s essential to have a plan for how you’ll spend your money. Some experts recommend zero-based budgeting where you designate where every single dollar will go during the month, starting with your basic needs (housing, food, utilities) and financial obligations (credit card payments, loan installments) and placing any remaining funds into savings. Others recommend a broader 50/20/30 guideline, which dedicates 50% of your income to needs, 20% to savings, and 30% to wants. These are only two out of many budgeting approaches. There are pros and cons to each, so take your time and find the right fit for your finances. Remember, the best budget for you is the budget you follow.
- Minimize your debt.
To create a substantial net worth, it just makes sense to limit your debt. If you’re starting out on your own and haven’t racked up mountains of debt, do your best to keep it that way. If you’ve made some poor financial decisions that left you saddled with considerable debt—especially high-interest consumer loans and credit card balances, create a plan for paying off those debts as quickly as possible. If you need help formulating a plan, you can find a variety of resources online. You can also see if your credit union offers debt counseling services. Once your money is no longer going to pay off debt, you’ll be able to take significant strides toward building wealth.
- Invest in assets.
Speaking of strides toward building wealth, investing in appreciable assets is the best way to build your net worth. The most common assets are real estate, stocks, and bonds. While real estate appreciation varies by location and depends on fluctuating market conditions, it is historically a safe investment that increases over time. Buying individual stocks is also a reliable way to grow your money, but this kind of investing can often be a high risk, high reward proposition. If you’re looking for stable growth over time (which we highly recommend), investment products like 401(k) accounts and mutual funds offer stability through diversification. Since there are so many investment options available, it’s always a good idea to consult a qualified financial advisor before committing your hard-earned money.
So, how much does it take to be rich? That answer is going to be different for everyone. Your situation is unique, which means your road to riches will be as well. Fortunately, you don’t have to plan your route alone if you’re a Great Meadow Federal Credit Union member. Our financial advisors are ready to help you find your starting point, establish your financial goals, and select the best products and tools to accomplish those goals.