Editor’s note: This article was first published in January 2013. The Warren Buffett example, holding his core stocks including Coca-Cola for the dividends, reflects his portfolio as of 2013. The 5% dividend on $2 million is a hypothetical example.
When I worked at Goldman Sachs, many of us used to talk about our “number”. Most American executives have an exact number: the amount of money that would be enough to stop depending on anyone else. In other words, the point where you could leave your desk, walk out the door, close it behind you and never look back.
A partner and friend who worked next to me kept his finances in a spreadsheet and would show me how close he was to reaching his number. In the end he stayed at Goldman Sachs five years longer than I did. I left in 2004 without having reached my figure; he didn’t leave, even though I’m sure he had reached his number.
I’m currently teaching a course on financial education, and it has made me think about what being rich really means, and try to come up with as precise a definition of wealth as possible so my students can understand it:
1. Wealth is more complex than a simple number, figure or amount of money. I know that Mike Tyson at one point earned $30 million for a single fight, and that he earned more than $300 million in total. He filed for bankruptcy in 2003. Some people, like Tyson, would rarely reach their number: given their lifestyle, they would always fall short of capital, whatever the figure.
2. Money is relative to our habits. To use Tyson as an example again, some people manage to earn $300 million and never become rich, while others are rich with an accumulated net worth of just $3 million.
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3. Being rich means you no longer need to work, at least not out of obligation. The best way to know whether you’re rich is to compare the passive income your assets generate with your lifestyle and annual expenses. If the balance tips in favor of your passive income, and it would stay that way for the rest of your life without you having to do anything, congratulations: you’re rich.
One caveat: you shouldn’t depend on selling your assets to cover your expenses, because that isn’t sustainable, especially if you became wealthy at a young age.
Which assets do the rich prefer?
Millionaires’ favorite asset is real estate, because owning property generates passive income through rents. Many millionaires aren’t worried about their properties (their assets) losing value, because that doesn’t hurt their passive income, even if it hurts the book value of the asset. That’s the difference between a home to live in and an investment property.
Of course, the truly rich prefer stocks. Take Warren Buffett, an investor who sleeps soundly at night without worrying about his shares losing value: as long as they keep paying dividends, that’s his passive income. That’s why he has no plans to sell the stocks in his core portfolio, which includes Coca-Cola.
Some people may not get this, but if you have $2 million in stocks that pay a 5% dividend, that generates $100,000 a year in passive income, which is practically an average executive’s salary. Of course, most people diversify across real estate, stocks and fixed income.
Being rich is more than money
There isn’t a single millionaire who has stopped working, apart from a few exceptions who lost their fortune or are on their way to losing it.
Being rich is much more than money: it’s the attitude that led you to wealth. If you hear someone say they’d like to be rich so they can do nothing, believe me, that person wouldn’t be rich even if they won 100 million in the lottery tomorrow.
Millionaires have reached their figure by doing what they love. Work gives meaning to your life, which is why you need to find a trade or occupation you’d be willing to keep doing regardless of the pay.
So let me define wealth once again:
“If you have enough assets generating enough passive income to cover your personal expenses and lifestyle for the rest of your life, and you’re lucky enough to be doing something you’re truly passionate about, then you’re rich.”
Source: Business Insider
Featured image: Ajay Suresh, CC BY 4.0, via Wikimedia Commons.
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