Have You Settled on a Definition of Wealth?

Time over Money - FadeWe often hear the terms rich and wealthy bandied about. Leaving aside the question of rich, we’ll focus on wealthy.

There is no doubt that there are many different opinions about what constitutes wealthy. Some consider investable assets ($500,000, $1,000,000, more?), some think in terms of income ($100,000, $150,000 or $400,000 per year?), while others might consider some combination of investable assets and income, while also mixing in consideration of a home’s value when forming their definition.

Is it having your own home spa? Is it having lots of cash? Is it having the ability to buy the car of your dreams? While there is not necessarily a right or wrong definition, none of those strike me as providing deep insight into how a given figure translates into providing a quality of life, or lifestyle, in retirement for an individual or their family.

What is Wealth?

Home Spa_Prisma

The definition I settled on years ago, shaped in part by the Edward Gibbon quote, “I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes,” is that I am wealthy when my family and I can live our chosen lifestyle on portfolio and passive income; and no longer require earned income.

Types of Income

Earned Income as defined by the IRS is all the taxable income and wages you get from working or from certain disability payments. For most people it is simply the money earned at a job while working for someone else. This is the type of income most are familiar with and the only source of income for many families. It is generally considered the least desirable type of income for that very reason. You are largely dependent on someone else for your livelihood and have less control. Also referred to as labor income.

Portfolio Income is the interest, dividends, and any other forms of payment received on the investments within your portfolio. Additionally, portfolio income also includes capital gains, realized from trading instruments such as ETFs, stocks, bonds, mutual funds, currencies, commodities, etc. For most people, investing in the stock market is the most common form of building wealth and portfolio income.

Income

Passive Income Also known as residual income, this is income that continues to be generated after the initial effort has been expended. It is the money you get from activities you performed in the past but are no longer required to do for an income (e.g. a pension from a previous job); the creation and selling of intellectual property (e.g. books, patents, or music); or assets that you have purchased (e.g. rental property, assuming the amount collected in rent exceeds the mortgage payment) from which you receive income.

What is your definition of wealth?  Are you wealthy now or are you currently on track to meet your definition of wealth?

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

25 Comments

  1. Love that Edward Gibbon quote! But I think it’s interesting how you and I drew different conclusions from it. For me, I don’t consider “no longer needing an earned income” as a factor that determines wealth. That might just be because I’m only 26 years old and no longer needing an income, at this age, seems nearly impossible (and I don’t like the idea of reaching “wealthy” status being impossible). The way I look at it, I consider myself wealthy when I no longer have to think about money on a month to month basis.

    Just goes to show that everyone has a different way of looking at it! In the end though, happiness is really all that matters 🙂

    • Thanks for stopping by, Jeff and offering a different perspective. “I consider myself wealthy when I no longer have to think about money on a month to month basis.”

      It seems to me, at least in a way, you’re definition is very similar to mine. Look at it this way, someone may earn a good income and not really think about money on a month to month basis; however, how would their perspective change if something beyond their control (e.g. merger, layoffs, illness, injury, etc.) happened with their current employment? Unless they had a significant emergency fund, they would go from being “wealthy” to something significantly less in a short period of time.

      “I don’t like the idea of reaching “wealthy” status being impossible.”

      I don’t blame you, and believe me, it isn’t impossible. Tough, but not impossible. The key, my friend is to plan wisely, think a little outside the box, and look for opportunities to generate as many sources of passive and portfolio income as possible. I’m convinced there is no other way to achieve financial freedom, whether it is referred to as wealthy, rich, or something else.

      Be well, and thanks again for stopping by and sharing your thoughts.

  2. I like this post, James! Our definitions are basically the same. I’ll consider myself wealthy or “rich” once the income generated from my assets is enough to cover my expense. At that point I’ll truly be free to do whatever I want with my time.

    • ” … once the income generated from my assets is enough to cover my expense.” Indeed. Gotta generate income from assets, and as I like to stress, from passive sources.

      “At that point I’ll truly be free to do whatever I want with my time.”
      Exactly! Being truly wealthy means having choices. Thanks for stopping by and sharing your thoughts.

  3. I think that Edward Gibbon quote sums it up nicely! I don’t think I will ever consider myself “wealthy” because of how others define it. I think I have “wealth” but need to really give the idea of the comparison to others and their definition more thought. I guess my definition is really all that matters.

    • “I guess my definition is really all that matters.” Indeed. While it is interesting to learn about, and give thought to, how others approach it, all that matters at the end of the day is your own definition. Another way I define wealthy is ‘availability of choices.’ When your money is right, really right, you have an abundance of choices (e.g.to work or not, to eat out or not, to buy a new car or not, etc.); however, when it isn’t right, your choices are limited and often, others dictate your quality of life.

      Thanks for taking the time to stop by, my friend. Be well.

  4. Hey James,
    I didn’t know that there was a difference between passive income and portfolio income, but now that you mention it, it makes sense. Portfolio income requires investing money, where as passive income requires investing time!

    You learn something new every day!

    Thanks for that

    • Indeed. When you think about it, there are three broad categories of sources of income: earned (e.g. working the 9 to 5 for someone else), passive (e.g. royalties from books, rental property) and portfolio (e.g. retirement accounts, brokerage accounts). The key to being financially free is getting to a position where you can live your chosen lifestyle of passive and portfolio income and no longer require earned (or labor) income.

  5. I do believe all the concepts you have introduced on your post. They are very convincing and can certainly work. Thank you for the post.

  6. I think the definition of wealth for me would be freedom. Your quote sums it up incredibly well James. I think I’ll just settle on that definition for myself as well. Thanks for the post!

    • Thanks for stopping by, Joel. Yep, I believe that definition works pretty well. While I have a number in mind, I believe that number will be different for everyone based on when they plan to retire and the desired lifestyle among other factors. I believe the key is to determine that number early, work toward it, and not be in a position where you save/invest blindly and then be forced into a retirement lifestyle dictated by what you have saved…or more accurately, failed to save. As I often say, having money is not about accruing a given dollar amount, it is about freedom – as you mention – and having choices.

      • I believe the freedom aspect of financial success is very important. Many people think about the car, boat, mansion etc. but if you can set it on fire and destroy it, it’s not really all that important. Being able to fly to wherever your ailing grandmother is in order to assist her for any reason is important and you can only do that if you have both the time and financial freedom to do so. To be at your son’s games, your daughter’s events, your wife’s celebration of her promotion or a friend graduationg from college….just to BE somewhere any time you WANT instead of asking a boss for “permission” is ultimately more important than the stuff!

        I’m not saying that having a certain amount in the bank isn’t important. My first milestone amount is $15,000. When I get back to that point I will feel I have begun my journey to where I ultimately want to be. My “end goal” is $13,000,000. At this point I am sure I could donate to charities, churches, etc. on a regular basis and impact society in a major way.

        • SavvyTaz…is that $13,000,000 or $1,300,000?

          • 13,000,000 SavvyJames…that’s my end goal

            • Nice. As Les Brown said (one of my favorite quotes), “I’d rather aim high and miss, than aim low and hit.”

  7. I never thought about it that way before, but being able to live my chosen lifestyle without earned income would certainly mean wealthy to me.

  8. When I aim for wealth I’m not aiming a certain amount of money. My definition of wealth is: The amount of time one can spend away from one’s job/career while bringing in the income that supports the lifestyle one’s chosen.

    My aim is to create a situation where my passive income so greatly outweighs my expenses that I can step away from my profession for years at a time without worrying about my income. That’s wealth in my book.

    • Yep, maximizing passive – and portfolio – income is the key. Doing so puts you in a position to do away with earned income and gives you choices…such as the choice to spend more time with loved ones.

  9. I love the Gibbon quote you shared. I’m going to have to write that one down! I think for me I’ll feel wealthy when I’m able to switch from my current office 9-to-5 job and pick up something that I love but pays less. In order to do this I have to save up enough now in order to afford contributing less to savings and retirement later (for example, I’m maxing out my Roth IRA now so that in the future I can get away with only contributing something like $100 or $200 a month and still have enough saved for when I retire from the workforce completely).

    • Thanks for stopping by and adding to the conversation, Kali. Like you, my aim is to be able to get away from the 9-to-5 grind and not be dependent on earned income. As you accurately note, that requires maximizing contributions – or at least working toward that objective – to retirement accounts with earned income. The wife and I are both maxing out our Roth IRAs and 401(k)s to put ourselves in that position. Again, thanks for stopping in.

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