Congratulations everyone! With the stock market, real estate market, and many other assets doing so well, many of us are rich! In fact, there are are record number of millionaires in the world. However, some people still don't think they are rich. Let's see how to tell if you're rich even if you think you aren't. There are a lot of delusional people out there!
Anybody who bought stocks and real estate between late 2009 and 2020 is sitting mighty pretty. When you're sitting mighty pretty, you tend to spend more frivolously and take on debt to buy things you don't really need. But at some point, a percentage of the population gets carried away, commits financial suicide, and brings the rest of us down with them.
I'm really hoping the good times will last for several more years. After all, it's more fun making money hand over fist than losing money.
Alas, I'm worried that with cash-out refinances reaching pre-crisis levels and stock market valuations at all-time highs, we're bound to repeat our mistakes from the previous financial crises.
How To Tell If You're Rich
There is a qualitative side and a quantitative side to being rich. If you're two standard deviations higher than the median household income of $69,000 and the median household net worth of $120,000, you're considered rich. At a two standard deviation, you're richer than 97.8% of all Americans.
When Do You Feel Rich?
I think the qualitative side of being rich is much more interesting because being rich is more of a feeling after all your needs are met. Feeling rich also comes from a temporary state of mind.
It's just like experiencing spikes of happiness due to a promotion, a raise, getting into your school of choice, hitting a home run, or getting married, followed by what is hopefully a sustainable level of contentment.
All The Times I Felt Rich
The first time I felt a little bit rich was a couple years after I bought my own place in 2003. The initial years were a little nerve-wracking due to the assumption of $425,000 in debt. But after two years, I felt like everything would be OK since I continued to get promoted. I felt rich because I finally owned a piece of America. No longer was I a price taker in an ever rising rental environment.
The second time I felt rich was when my company agreed to let me go with a severance payment and all my deferred cash and stock. I felt like I had won the lottery because I would have gladly left if they just gave me my deferred cash and stock that paid out over the next five years.
But they decided to give me a six-figure lump sum check when I left as well, which has almost doubled since 2012 because I invested all of it in the stock market.
The third time I felt rich was about three years after I left Corporate America. Again, the initial years were a little worrisome despite the severance because I wasn't sure whether I had made the right move. But by 2015, I knew we were home free as Financial Samurai grew so my wife joined me in early retirement. Having the freedom to choose how we spend 100% of our time was priceless.
The fourth time I felt rich was when our passive income finally reached a level that could sustainably provide for the lifestyle we wanted. Before then, we were only generating about $80,000 a year, which doesn’t go far if you want to raise a family in San Francisco. It was after hitting $200,000 that I felt I could finally slack off a little bit without worrying about falling too much behind.
The most recent time we felt rich was when our son was born. He is a miracle baby because we had tried for several years with no luck. His birth helped crystalize all the effort we had put into studying, saving, investing, working, and taking risks. Since my wife and I are both pretty frugal, using our wealth to provide for someone feels wonderful.
How Rich You Should Feel Based On Net Worth And Income
Given I can't tell you how to feel, let me introduce to you a simple chart that tells you how you should feel based on a simple net worth-to-income multiple. You can use the average gross income you've earned over the past three years.
Or you can separately plug in your personal ideal gross income where making more brings you no additional happiness. That ideal income figure for us is $300,000 a year for a family of up to four.
Eventually, you will reach a point where you will no longer want to work for anybody or hustle as hard because your wealth is making more money than you need.
For example, during a bull market you might see a 10%+ appreciation of your investments for the year. If your net worth is $1 million and it was 100% invested, you might begin to start second-guessing the necessity of working at a $100,000 a year day job.
Hence, it follows that starting at around 10X your average income, you'll begin to start imagining what being rich really feels like. You'll start to daydream about what it would be like to actually work at a job you enjoy. Perhaps you might even get enough courage try becoming an entrepreneur.
20X Income Should Make You Feel Rich
When you hit 20X your average income in net worth, you finally begin to actually feel rich. A lot of folks believe that you're financially independent once you reach 20X your average annual expenses.
But I never felt this way because expenses can dramatically increase if you have health issues, experience some type of accident or natural disaster, start a family, or your parents need senior care assistance.
Once you're over 50X your average income, you are unquestionably really rich, even if you don't believe it. At 50X, you're no longer second guessing your spending habits because you likely won't be able to spend all your money before you die.
You only need to earn two percent a year to sustain your lifestyle without touching principal, while the risk free rate of return is currently at 3%.
Having more money no longer brings any sort of happiness. You also begin to feel guilty for having so much. As a result, you give more of your time and money away to institutions and people that need your help the most.
Are these multiples subjective? Yes. But they are also grounded on the principle that the ideal withdrawal rate does not touch principal. Once you have a net worth that will always provide the lifestyle you want that will never decrease in value, you are quantitatively truly rich.
Hoarding Can Be A Disease
Jeff Bezos from Amazon is worth over $100 billion. When asked what he plans to do with his money recently, he said he wants to use his wealth to go to space. Jeff has the incredible ability to ignore the poverty plight within his own Seattle community.
Instead, he'd rather hoard as much of his wealth as possible while he is still alive. Yes, he's revolutionized the way we shop and made consumption cheaper and easier, but come on now. He is truly rich and can't spend all his money, even if he tried.
Given we can only pass down $12.06 million per person death tax-free in 2022, hoarding so much more than $12.06 million, let alone billions, makes little sense as the government will first tax you ~40% and then proceed to squander much of your money.
Therefore, the best strategy for feeling rich is to determine your ideal income for maximum happiness and accumulate at least 20X that income figure. Once you get there, spend your time figuring out as many ways to help other people as possible. The more you give, the richer you feel.
Getting Rich And Staying Rich With Real Estate
As mentioned, one way to feel rich is to earn income passively without having to work. You feel like you're getting something for free. Therefore, I suggest investing in real estate.
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America and earn income 100% passively.
My real estate investments account for roughly 50% of my current passive income of ~$300,000. Both are free to sign up and explore.
Stay On Top Of Your Money
You can tell if you're rich by sign up for Personal Capital, the web’s #1 free wealth management tool to track your net worth.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.
How To Tell If You Are Rich Even If You Think You're Aren't is a Financial Samurai original post.