Measuring Your Wealth

One of the natural human tendencies that a lot of people have is to compare themselves to their peers.  In life a lot of people will be measuring your wealth in relation to their own, rightly or wrongly, as a tool of comparison.  In common parlance this deals directly with the saying, “keeping up the Joneses.”  However, since it is generally socially unacceptable to ask how much money other people have, you have to guess where you stack up.  While reading through several books, and websites there are three general measures I think people can use to give them an estimate of how they stack up.

Measuring Your Wealth in Relation to Scientific Findings

It has generally become common knowledge that making $75,000 is generally when people are happiestSince I think a lot of people want to know how they can make that money passively rather than having to work a 9-5 job, I’ll look at what it takes to generate that money from dividends, interest, and other forms of passive income.  For real estate, investors generally try to achieve a 10% cap rate.  As a result it would take a real estate portfolio of at least $750,000 to get your 10% cap rate to get your $75,000 a year.  One of the possible ways of doing this is through an FHA 223 loan where you get advantaged terms to buy an apartment building.

For stocks, I would generally aim for a 3% dividend yield.  In order to generate a $75,000 income from stocks, you would have to own a $2.5 million dollar portfolio.  For most people this will be a multi-decade undertaking using dividend reinvestment plans in strong blue chip stocks or index funds.

Bonds… bonds are tricky at the moment.  Since we are so out of the ordinary in this interest rate environment, I (personally, your circumstances could be different) would wait before trying to get $75,000 in interest since bonds are overvalued.  As a result I have to go into the theoretical.  Normally bonds would send you interest between 6-8 percent of your investment.  This would require a portfolio worth $937,500 to $1.25 million. 

Using the Equation from the Millionaire Next Door

In his book, The Millionaire Next Door, Thomas Stanley gave an equation for measuring your wealth, and seeing how good you are at accumulating wealth.  The equation for your expected wealth calls for multiplying your age by your annual income, and then dividing that number by ten.  If you are 50 years old, and make $100,000 a year, then your expected net worth would be $2.5 million dollars.  Dr. Stanley then says that have to multiply that number by two to be a “prodigious accumulator of wealth”.  If you are in that pool, you are comfortably ahead of your peers in terms of your net worth.  As noted by many others though, measuring your wealth in this way isn’t accurate for young people, and should only be used by those who are in their fifties or older.

I Prefer a Different Way of Measuring your Wealth

While, the above two methods are perfectly legitimate ways of determining your net worth, I find them too subjective for individual circumstances.  I prefer a more absolute way of measuring your wealth.  If you close your eyes, and imagine your life, what does it look like?  Are you dressed in designer dress shirts, drinking thousand dollar wine, and have a third penthouse in New York?  Do you just want enough to have a house in a blue collar town, while you watch your kids play basketball, as you donate a few thousand dollars to charity? Maybe you want to be a hermit in the swamps of Louisiana fishing for catfish all day.  Once you have an idea of how you want to live your life, take out your phone and see how much your dream life would cost.  One of those options costs millions of dollars a year, and one costs a few thousand.

Once you have calculated the cost of your dream life, compare it to how much money you are bringing in per year.  That difference is how I measure my wealth.  How far away am I from having torrents of money flowing into my bank account so I can travel around the world, give thousands to charity, and dress nicely.  As I get closer to my goals, I am getting wealthier by the standards I choose to set for myself.  The standard you set for yourself is no longer subjective, you are either at your goal, or you aren’t.  Don’t allow society to tell you what you should want.  Only you can do that.