The Definition of Wealth, and Why it is Important!
I have heard the definition of wealth stated in many different ways. I wrote this as an essay for college and thought it would be worth sharing with you as well.
A lot of people define wealth by the amount of money we have to our name. Wealth is a relative term with many definitions. The concept of rich and wealthy often bears images of nice houses, fancy cars, lavish lifestyles, etc. The problem with this interpretation of wealth is that it can lead to a life of poverty. I always say that I would rather “look poor, but be rich;” as opposed to “looking rich, but being poor.”
Definition of wealthy: having a great deal of money, resources, or assets; rich.
Definition of rich: having a great deal of money or assets; wealthy.
The Three Most Common Definition of Wealth
I want to discuss three ways to understand the definition of wealth today. The first theory is that of Robert Kiyosaki, author of the book Rich Dad, Poor Dad. The second theory is that the definition of wealth is relative to an individual’s situation. The third theory that will be discussed is the theory that wealth is the number of assets divided by liabilities owned.
The reason it is important to have an open mind and understand all three definitions is in order to come to your own conclusion logically. I don’t want you to define being rich as having a nice house, or a fancy car. I want you to define rich in a logical, safe, and healthy way!
Robert Kiyosaki’s Definition of Wealth
The first theory about the definition of wealth is that of author Robert Kiyosaki. Robert believes that “The definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living.
For example, if your monthly expenses are $5,000 and you have $20,000 in savings, your wealth is approximately four months or 120 days. Robert measures wealth in time, not dollars. (Kiyosaki, 2013)” As you can tell this is not what the average person thinks of as the definition of wealth, and yet this might be a much more useful definition of wealth than Websters.
Wealth is a Relative Term
The second theory is that wealth is a relative term. An example of this is illustrated by Morgan Housel: “Andrew Schiff, brother of investor Peter Schiff, is the director of marketing at broker-dealer Europe Pacific Capital, and earns $350,000 a year — about seven times what the average American household earns.”
But in Schiff’s world, it just doesn’t cut it. “I feel stuck,” he told Bloomberg earlier this year. “The New York that I wanted to have is still just beyond my reach.” Earning over $1,000 per day doesn’t cover private school tuition for his children, rent on his three-month summer vacation rental, and the home of his dreams. “All I want is the stuff that I always thought, growing up, that successful parents had,” Schiff said. (Housel 2012)”
This clearly illustrates that Schiff considers himself to lack wealth, despite being in the richest one percent of the nation. Schiff defines wealth as being driven by what a dream lifestyle looks like, and this definition is a perfect example of relativity. The other 99% of the world would consider an annual salary of $350,000 to be massively wealthy!
The Government’s Definition of Wealth
The third theory about wealth definitions is the legal definition used by the Code of Maryland: “Wealth means the sum of net taxable income and the adjusted assessed valuation of real property. (Code of Maryland 2014)” As you can tell this definition is more in line with the traditional interpretation of wealth. It does differ slightly as a lot of people assume that a good salary automatically means great wealth.
I have found this to be untrue a lot of times. Unfortunately, people have a tendency to increase their expenses every time their income increases. If an individual earns twenty thousand dollars annually and spends every penny of it wastefully, that person would have the same net worth at the end of each year as somebody who earns two-hundred thousand dollars annually but also spends every penny wastefully. This theory is how banks define wealth and would be necessary to understand when attempting to procure financing.
Tracking Your Net Worth
There is a common phrase “What gets measured, gets managed” that is all about tracking your numbers. That is why personal fitness trainers always recommend weighing yourself first thing in the morning to ensure you are measuring your progress.
In the same way, it is critical to track your net worth. I recommend checking your net worth every month in order to keep tabs on your wealth. This will refocus your mind on building wealth, and help you improve your net worth much faster!
Personal Capital is my favorite website for tracking net worth and all of my assets/liabilities!
Here is an excel spreadsheet you can use to manually track your net worth every month.
How Do We Define Rich?
You may be saying to yourself; “who cares?” Why is it important to define rich before you become rich? Because if you start building wealth without a foundational understanding of what it means to be wealthy…you may let expense creep happen!
Expense creep is when you get a raise, and upgrade cars…get a raise, and buy a bigger house…get a raise, and buy a Motorcycle…etc. Now, before you get fired up, I’m not suggesting you shouldn’t celebrate getting a raise.
You should absolutely celebrate improving your financial wellbeing.
You need to celebrate with one time expenses though, not items like expensive cars, houses, and toys that require monthly payments and essentially eat away your pay raise. Think of it this way…if you get a $500/month raise, and buy a motorcycle that costs you $450/month to own, insure, and maintain…you really only got a $50/month raise. Sure, you’ll pay the motorcycle off eventually, but inevitably you will find something else to spend it on.
Expense creep happens unexpectedly, and can easily catch you off guard. THAT is why it is crucial that you understand and cement your personal definition of wealth immediately!
I have discussed three very different definitions of wealth described throughout this essay. Each of these definitions has followers that believe in its validity. The trick is to discover which definition to set goals based on, and then to follow these goals in order to attain a sense of accomplishment for achieving those goals.
I won’t allow myself to be influenced by other definitions of the term wealth. If I did, my goals would fluctuate throughout life, and I would never truly achieve wealth by any definition. There are many other ways to interpret great wealth, but these are the most unique, and simple to explain.
Now it is time to choose which mantra will become a credo for you in life in order to begin building your wealth. Wealth define is important because you need to determine a specific metric to track. No matter how you define wealth, you need to make that determination, and strive toward it!
Kiyosaki, Robert. “The Definition of Wealth.” http://www.richdad.com/Resources/Rich-Dad-Financial-Education-Blog/May-2013/the-definition-of-wealth.aspx, 2013
Housel, Morgan. “Putting Money in Perspective.” https://www.fool.com/investing/general/2013/08/23/carl-icahn-and-apple-a-twitter.aspx, 2012
The State of Maryland. “Code of Maryland.” https://definedterm.com/wealth, 2014