Let’s say you have two rich people: Dan and Dave.
They are both in their mid-50s, work in technology, and enjoy nearly the same annual salary and bonuses. They each get along very well.
Dan drives an older model vehicle. He lives in a house that is beautiful but cannot be described as a mansion. Dan isn’t big on material things, so he doesn’t overspend on clothes or holidays. But he makes good money, saves a lot of it, invests wisely, and has a net worth of $5 million to show for it.
Dave also makes good money, but he shows it off more than Dan. Dave drives a luxury car. He lives in a luxurious modern home with all the HGTV fixings. Dave has a jet ski, wears nice clothes and goes to fancy restaurants. Despite his lavish spending habits, Dave is still able to save, though not as much as Dan, giving him a net worth of $2 million.
So who is richer? Dan or Dave?
Personal finance experts will tell you it’s definitely Dan. Wealth is unrealized spending, right?
Society would say Dave. Dave has nice stuff and shows off his money. They have toys and status symbols. Right or wrong, for most people this is the picture of wealth.
There’s really no right answer here. They may both be living their own rich lives.
Maybe Dan values the security and convenience that financial freedom brings. Maybe Dave values spending his money in the here and now and doesn’t care that much about a larger number.
Or maybe Dan is so nervous about running out of money that he never allows himself to enjoy it. Maybe Dave is stuck on the hedonic treadmill and can’t stop spending.
Maybe this is a bad example because they are both rich by objective measures.
It’s not always easy to say this from the outside.
This year I met a man who drives an incredibly beautiful car. It’s so luxurious that I googled how much it costs. We’re talking about something over $200 thousand.
My jaw nearly hit the floor when I found out.
This man must be rich beyond his dreams, right? Everyone told me this.
That man is rolling the dough. Just look at it!
Then I got to know him a little bit and he started asking me questions as the resident finance person. You see, he did a major home repair that would require a significant amount of money. He asked me how I was going to pay for this.
Do you think I could borrow against my 401k for this? Will you get a personal loan?
On the face of it, this man appears to be extraordinarily rich. He has a nice house, expensive car, flashy clothes, etc. there is. Status symbols scream rich man.
But maybe he’s up to his eyeballs in debt.
Society often looks at status symbols as a measure of wealth, but net worth itself has also become an indicator of success for some people.
This is a relatively new concept.
Joseph Moore writes in his excellent new book How to Get Rich in American History:
Net worth only matters at three times in life: When you die (who gets what?), when you borrow money (can you pay us back?), and when men feel the need to impress each other (whose is bigger?). This is it. There is no other time when net worth is a relevant statistic.
You’ll search in vain through the first 200 years of U.S. history to find the “net worth” once mentioned. Before the First World War, it was not included in a single family finance book. Historically, the closest term to this was “worth an estate,” the old English expression for families with landed wealth. But no one mentioned the total market cap.
Worrying about what your net worth means is new to our species.
Working in the wealth management industry can in some ways numb you to money, but I think a lot about the idea of what it means to be rich because I work with so many people who have a lot of money.
If you have a huge net worth but never spend your money because you’re constantly worried, that’s not wealth.
If you spend all your money on this to be clear It’s not rich to be so rich that status symbols make you constantly worry.
The goal is to be somewhere in the middle.
You have a good number, but you also enjoy your money.
You save money, but you also spend it on your priorities.
You make plans for the future but 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 others see you as rich? It depends on your definition of rich.
Being content with what you have, no matter how many, is the true sign of wealth.
Is this easy to remove?
Of course not!
Michael and I talk about what it means to be rich and much more in this week’s Animal Spirits video:
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Further Reading:
Why Don’t You Feel Rich?
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