In this first article, let us first define the concept of “wealth”. I will not refer to the term “rich” in this article because rich has no definitive value. What I mean by that, is that one person that perhaps earns $25,000 a year, might view having $250,000 in liquid assets as being rich, while another person that is more successful might require tens of millions of dollars of liquid assets in order to “feel” rich. Rich is ambiguous and not a quantitative value. Wealth, on the other hand, is a formula as opposed to a value. The best definition of wealth that I’ve found is “when your money makes more than you do, you are officially wealthy(1)”.
Let me see if I can clarify this further. Let’s take a Joe, an average American that earns $5,000 a month, and Joe wins the lottery netting him $1.2 million after taxes. If Joe is smart and decides to put that money in the bank, which earns him an average of 5% interest annually, then his winnings will provide him about $5,000 a month in passive (non-effort driven) income. Assuming that Joe’s expenses do not increase, he is now able to stop working and allow his principle in the bank to provide all of his needed income. Therefore you can see how wealth becomes a formula that does not have any definitive value set.
Not all of us, though, are lucky enough to win the lottery. So how does one get on the path to true wealth? Obviously you need to find a way to make your money start earning money. Though this concept is very simple, it is elusive to most Americans. Most individuals – over 50% of the population - have no substantial savings beyond an emergency fund and a small IRA. Therefore, most people are completely dependent on their jobs to provide the income needed to cover their expenses. As you start to add more money into your investments you start to become independent and on the road to wealth. As those investments start to earn interest, and that interest approaches what your full time working income is, then you start to become wealthy.
So remember, until you can make your money earn more than you do (or at least more than what your expenses are), you will always be dependent upon other sources of working income and never be truly wealthy.
(1) Dave Ramsey, Success Magazine, May 2008
The Dems keep mentioning “middle class” and “upper middle class” when speaking of tax increases/decreases. What are the income definitions of the two classes?
I am retired; my income is $60,000 a year. What “class” do I fall into?
You wouldn’t believe how many sources I have quizzed and still no answer.
Comment by E. Burkett — November 30, 2008 @ 2:46 pm
Interesting question. Technically, according to Wikipedia (http://en.wikipedia.org/wiki/Middle_class), middle class was defined as an intermediate social class between the nobility and the peasantry of Europe. In today’s society, though, I think the term – middle class – is used in political and media terms as those who know they aren’t financially wealthy, but aren’t living on food stamps either… basically 95% of all Americans. Though this works well for political speeches (as everyone feels that the government is talking to them), it doesn’t work well for a classification.
To your point, if you earn $60,000 a year, you are actually in the top 26% of income earners in the US (see http://articles.moneycentral.msn.com/Taxes/CutYourTaxes/make-32k-youre-in-the-richer-50percent.aspx). You and everyone else that earns that or more actually pay 86% of all our taxes. The point I’m trying to make is that in the past (50+ years ago) the middle class was a fairly easily distinguishable class of individuals. Today, though, there is becoming a wider and wider gap between the wealthy and the poor. If you take the IRS estimates from the link above, technically the middle of the middle class (average income among all citizens) is someone who earns $31,987. I don’t know about you, but that is extremely low to me.
I foresee a time in the very near future, where individuals will either have the means to financially support themselves (the wealthy), or will be completely dependent upon government subsidies (poverty). It up to each of us which side of the line we wish to be on. I firmly believe that given the proper tools and information, each and every one of us has the capabilities to achieve financial freedom.
If you want to hear an interesting perspective on this, visit http://www.15yearsleft.com
Comment by bmccleary — December 1, 2008 @ 10:25 am