It’s common knowledge that Americans spend more time planning their vacation than on financial planning. Similar to planning on where to go, why you want to go there and how to get there, take some time to think about all aspects of what, why, and how you want to be rich.
What Do You Really Want?
First, ask yourself what you want. Do you want to be financially secure, financially independent, or rich? Financial security, financial independence, rich, or wealthy all mean different things. The journey I share with you is a road to financial security, which may lead to financial independence or wealth but that depends on how much work, time, and effort you want to put into it and what is important to you.
- Financial security: You have peace of mind you feel when you aren’t worried about whether your income will cover your expenses. It’s a state of mind and emotion.
- Financial independence or financial freedom: You have enough wealth to live on without having to work.
- Rich or wealthy: Your money and assets exceeds your expense
A lot of people say they want to be rich without knowing really what that means or what they want. If you close your eyes for a moment and ask yourself what do I want, what picture comes to you?
What does being rich mean to you?
Does being rich mean having a big house, a boat, or a private jet? Or, do you seek financial freedom without a boss?
I think the best definition of being rich is financial freedom. It means you’re free to do the work you want without worrying how much the work will pay you.
Another great definition of wealth is when passive income exceeds your expense. If you discovered that you’re suddenly unemployed, how long can you and family get by without your income? Wealth can be measured by the amount of time that your passive monthly income can support your lifestyle if you stopped working today. Most people don’t have passive income let alone much savings. Only 57% of American households have $1,000 in savings.
Here’s another way to look at your wealth by the amount of money you have to survive if you lost your job today:
- Less than one month: you are broke
- One to three months: you’re one to three months away from being homeless; pray your parents, relatives, or friends can take you in
- Three to six months: you have enough money until you find another job, if you’re marketable
- Until you can collect Social Security, retirement fund or some other income: comfortable
- As long as you or your family needs: rich
- Enough for next generation: ultra-wealthy
Why Do You Want to be Rich?
The second question is, Why do you want to be rich? My family moved every year, searching for a cheaper apartment. When I slept, I dreamed of being in a mansion so big with so many rooms that I couldn’t find my parents or my three siblings. This explains my obsession with real estate investing. Why do you want to be rich? Think about what is important to you and what you value. What was the happiest time in your life and why? These questions will help you determine why you want to be rich.
How much money do you need to be rich?
When people are asked how much it would take for them to feel rich, the answers are not clear or succinct.
According to the Economic Policy Institute, the top 1% makes over $385,000 compared to the $43,000 the average American household makes. The top 1% wealthy has over 10 million dollars in net worth. Yet, only 65% of them considered themselves to be wealthy. Since the rich don’t consider themselves rich, they were asked how much they thought it would take to be rich. The most common answer was, “twice as much money as they currently have,” no matter what the figure was.
4% Rule
How much money do you need to do what you want? Obviously, this varies with everyone. An average American household lives on $5,000 per month, or $60,000 per year. So you can start with an end in mind and try to come up with a plan to generate that amount in a monthly income. If you have a million dollars in retirement, and withdraw 4% each year, you can pay yourself a little over $3,000 per month. Couple this with $1,461 (average monthly benefit) in Social Security, would get you pretty close to your goal. But- I have bad news for you. Since we’re all living longer, which means we’re living longer with ailments that results in higher health care cost, this 4% rule is quickly becoming the 3-3.5% Rule.
25X Rule
If you have an average person’s spending, with the 25X rule of thumb in mind, you’ll need $1.5 million dollars. With this sum of money, you can withdraw 4% annually at $60,000 per year.
When Do You Need The Money?
Decide when you need that money by. Now- cannot be the answer. Rome wasn’t built over night and neither will your grandiose net worth.
Most people strive to save for their retirement, which is 60 or older. Suze Orman says you should work until you’re 70, not a month or a year before. But, I have news for you. You may not want to wait that long. As you get older, you’ll have less tolerance for getting up at dawn, fighting the morning traffic and being told what to do and how to do it. Some of you are saying, “I’m tired of all that now.” Wouldn’t it be spectacular if you can retire at 50 something or earlier? Does the idea of quitting your job and doing something you really want to do excite you?
How will you get to your goal?
I wish I could tell you that I found a secret to getting rich. But, there is no secret, just as there is no fountain of youth. Botox is not the answer. It takes knowledge, hard work, perseverance, and time.
There are three ways to build wealth:
- Paper assets, which are stocks, bonds
- Real estate
- Business
Most wealth is generated through businesses. The most important take-away is that you need a vehicle to build wealth. If you choose to put your hard earned money under the mattress or in a savings account, it will not lead you to a pot of gold.
Once you figure out the what, why, when, and how to become rich, set a financial goal to get to your first destination.
“The things that are easy to do are also things easy not to do.”
-Theodore Levitt