Let’s say you have two rich people — Dan and Dave.
They’re both in their mid-50s, work in tech, and enjoy roughly the same annual salary and bonus. Each makes a very good living.
Dan drives an older model vehicle. He lives in a house that’s nice, but wouldn’t be described as a mansion. Dan isn’t much for material possessions so he doesn’t spend extravagantly on clothes or vacations. But he makes good money, saves a big chunk of it, has invested wisely and has a net worth of $5 million to show for it.
Dave also makes good money but he flaunts it more than Dan. Dave drives a luxury automobile. He lives in an upscale, modern home with all the HGTV accouterments. Dave owns a jet ski, wears nice clothes and goes out to fancy restaurants. Despite his profligate spending habits, Dave is still able to save, just not as much as Dan, so he has a net worth of $2 million.
So who’s richer — Dan or Dave?
Personal finance people would tell you it’s obviously Dan. Wealth is spending that doesn’t happen, right?
Society would say Dave. Dave has nice stuff and shows off his money. He owns toys and status symbols. Right or wrong, this is the picture of wealth to most people.
There really isn’t a right answer here. They might both be leading their own rich lives.
Maybe Dan values the safety and comfort that come from financial freedom. Maybe Dave values spending his money in the here and now and doesn’t care as much about a bigger number.
Or maybe Dan is so nervous about running out of money that he never allows himself to enjoy it. Maybe Dave is trapped on the hedonic treadmill and can’t stop spending.
Maybe this is a bad example because they’re both rich by objective measures.
It’s not always easy to tell from the outside.
I met a guy this year who drives an insanely nice car. It’s so luxurious I had to Google how much it costs. We’re talking over $200k.
My jaw almost hit the floor when I learned that.
This guy must be rich beyond his wildest dreams, right? That’s what everyone told me.
That guy is rolling in the dough. Just look at him!
Then I got to know him a bit and he started asking me questions as the resident finance guy. You see he had a large home repair that would require substantial funds. He asked me how to pay for it.
Do you think I can borrow against my 401k for this? Take out a personal loan?
By all appearances, this guy looks extraordinarily rich. He has the nice house, expensive car, flashy clothes, etc. The status symbols are screaming rich guy.
But maybe he’s just in debt up to his eyeballs.
Society often looks to status symbols as a gauge of wealth but net worth itself has also become something of a marker of success for certain people.
This is a relatively new concept.
Joseph Moore writes about this in his excellent new book How to Get Rich in American History:
Net worth matters in only three moments of life: when you die (who gets what?), when you borrow (can you pay us back?), and when men feel the need to impress one another (whose is bigger?). That’s it. There is no other time when net worth is a relevant stat.
You will search in vain across the first 200 years of U.S. history to find “net worth” mentioned once. It did not occur in a single family finance book before World War I. The historical term that came closest was “an estate worth,” the old English phrase for families with landed wealth. Yet no one referred to total market value.
Worrying about what your net worth means is new for our species.
Working in the wealth management industry can make you numb to money in some respects but I think about the idea of what it means to be rich a lot because I work with so many people with lots of money.
If you have a large net worth but never spend any of your money because you worry all the time, that’s not rich.
If you spend all of your money to appear wealthy through status symbols to the point that it causes you to worry all the time, that’s not rich either.
The goal is to be somewhere in the middle.
You have a good number but you enjoy your money too.
You save but you also spend on your priorities.
You plan for the future but you enjoy the present.
You have a burn rate that falls below your income level.
Living a rich life is not easy. Does it really matter if everyone else considers you rich? That depends on your definition of rich.
Being content with what you have, regardless of the number, is the true sign of wealth.
Is this easy to pull off?
Of course not!
Michael and I talked about what it means to be rich and much more on this week’s Animal Spirits video:
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Further Reading:
Why You Don’t Feel Rich
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