If someone asked you what you consider rich, what would you answer? I am not referring to health, friends, family, or other areas of life that are truly enriching. Rich in terms of finances. I for one am really struggling with the concept of “being rich”. What does it mean to be rich? Do you need $/€/£ 1 billion, $/€/£ 100 million, $/€/£ 1 million, or $/€/£ 500,000?
Are you rich with a million dollar house?
I have heard some people say $/€/£ 10,000,000. In words: Ten Million Dollars. Ten Million, isn’t that an extraordinary sum? Wouldn’t most people be happy with a tenth of it and still consider themselves rich? A tenth that is $/€/£ 1,000,000. Unless you lack even the most basic of money management skills, one million will allow you to easily make ends meet and live off the returns for the rest of your life.
In my book, $/€/£ 1,000,000 in easily accessible funds means you are rich. I am not referring to the value of your house or company. These are inaccessible funds that cannot be sold easily, even worse, produce no financial returns. Living in a $/€/£ 1,000,000 house does not mean you are rich. It simply means you are sitting on a massive stash of unproductive money.
I am referring to productive money. One is certainly well off if the house is paid for, but the capital that is bound to your property is not earning a steady financial return. Of course, the one million dollar house provides a roof above your head. But so does a house for a few hundred thousand. A house certainly carries great emotional value, but that doesn't derive from its price but the moments you experienced in relation to the house. Living in a million dollar mansion doesn't mean one is rich. However, by, for instance, downsizing and investing the freed capital from a house sale, you instantly become rich, as the capital can now be used to produce steady financial returns.
Rich is living off your asset’s returns
But one million in accessible funds - whether in your savings account, shares, bonds, or rented properties - most certainly makes you wealthy. At least as far as I am concerned. And this is really what it comes down to - perception. Ask ten people what they consider rich and you’ll end up with varying answers. Wealthy is what you perceive wealthy to be. You are only rich if you consider yourself rich.
But let’s be less philosophical: Being rich means being able to live off your assets’ returns. Whether that is your dividends, the interest you are earning from your savings, the rental income from your million dollar properties. As long as you are able to live on your asset’s returns, you are certainly rich. If you have assets big enough to produce returns that are beyond your living expenses, you are even richer. As this point, your money is working so hard that it is creating even greater wealth; not just simply providing you with the means to live a nice life.
But if the assets yield too little return to live comfortably without touching the principal – whatever that means for each individual – one is not rich.
Complaining about not being rich enough
I am always astonished by reports about people in some of the richest cities in the world such as London or New York complaining about how difficult it is to survive on a six-figure salary. I live in one of the most expensive cities in the world, Paris and am able to live on a fraction of that. And I live well. In fact, imagine a figure of € 18,000 ($ 20,460 / £ 12,885) per year including car, insurances, rent, holidays, and other leisure expenses. That is the approximate figure for the median salary in most developed countries.
At a 5% yield rate, the principal required to earn that median annual salary and comfortably live on your investment returns alone is around € 450,000 ($ 511,354 / £ 322,049). That is after you paid capital gains tax. In countries with hardly or no capital gains tax, the principal required to earn that annual income from your principal is much lower.
But what if you are struggling or even unable to live on, let’s say, $/€/£ 50,000 per year? That’s assuming a 5% return on a $/€/£ 1,000,000 investment. For whatever reason; may it be an expensive taste in cars, furniture, the two-yearly luxury vacations, or medical bills, some people seem to find it difficult to live on that amount. Yet the majority of the global population lives on much less and they are still able to live good lives.
And think about it, once you are able to live on your investment returns, you free up a huge amount of time to pursue other business interests and opportunities, travel, or simply enjoy the pleasures of life.
Rethink what is rich
Undoubtedly, living in an expensive city, exotic holidays, extravagant hobbies, and in a constant pursue of new gadgets affect the perception of what you think you need to be rich. Sometimes, however, it is useful to take a step back and look at how others succeed in living a fulfilling life (including the material pleasures). Instead of owning a new gadget every year, they might keep their phones for two or three. It instantly slashes your financial needs to be rich and changes your view on when you are rich.
We are all influenced by those around us and the environment we find ourselves in. And it is then when it is useful for our own wellbeing, for how many feel unhappy about not being rich enough, to see that many around us live a wonderful life on much less than multiple millions or billions.
So what does it then me to be rich? I am a firm believer, as I wrote before, that the moment you are able to live on your investment returns – not touching your principal – you are rich. But each single one of us has to decide how much they really need to be happy. Just run a quick calculation on your living expenses. If you find that you are already able to live on your investment returns, give yourself a clap on your shoulder, pop a bottle of champagne and smile: you are indeed rich.