Financial Advisors: Here’s the Net Worth That Makes You ‘Rich’
What does it really mean to be rich? It’s hard to say — everyone has their own definition, and yours might be wildly different from the person next to you. In fact, it can be hard to even get people to agree on how to measure wealth. Is it the size of your house, or owning more than one? The number in your checking account? The balance in your 401(k)?
One common measure is a term you’re probably familiar with, net worth. Simply put, net worth is the total dollar value of all the assets owned by a person or corporation, minus the dollar value of the liabilities they owe. For example, if a person’s home had a market value of $500,000 you would add that sum to their net worth — but if they are also still paying off the mortgage, that’s a liability that would need to be deducted.
So how much net worth do you need to be considered rich? GOBankingRates asked financial advisors for their opinions.
You’re rich when you feel rich.
“That might be a corny answer, but it’s really the best one I have,” said Scott Lieberman, founder of Touchdown Money.
“Of course, setting concrete goals can be helpful. [A million dollars], while not as much as it used to be, still seems like a meaningful milestone. I mean, who doesn’t like the idea of being a millionaire?” he said. “So let’s say you’re starting out as an entrepreneur — or a career-oriented person — and you’re looking for an ambitious medium- to long-term goal. I’d say, ‘Try to become a millionaire!’ That might not make you ‘filthy rich’ by today’s standards, but you’ll definitely be on firm financial footing.”
When you’ve reached total financial independence.
“You are rich when you have reached financial independence (FI), or what they used to call ‘f-you’ money,” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth. “You have reached FI when you can live off of your investments and pay your bills. When you are financially independent, you can quit your job whenever you want and are now working for the fun of it.
“Another way of looking at being rich is when you hit the ‘tipping point.’ You have hit the tipping point when your investments make more for you each year than your salary does. When you hit this point you will realize you make money in your sleep and don’t have to work.”
It depends on where you live. In SoCal, it’s at least $5 million.
“The definition of being rich varies depending on where one lives geographically,” said Jeff Runyan, investment advisor at Runyan Capital Advisors. “Rich in Brentwood, California, differs from rich in Baton Rouge, Louisiana, and [is] incredibly different from rich in Bangalore, India.”
He continued, “As a wealth manager serving clients in Southern California, we consider a client with $5-$20 million in investable assets rich, and that doesn’t include the equity in their home. But the funny thing about asking a person if they’re rich, however much money they have, they always see the people who have more as actually being wealthy. To some, being rich may mean flying first class without regard for the price of the ticket, but if you ask those that fly first class what they define as rich, they’d say those who fly private.”
$2.5 to $5 million gets you a comfortable lifestyle.
“Historically, having a million dollars was kind of a big benchmark for a lot of people to hit. However, a million dollars is not going as far as it used to,” said Ben Fraser, chief investment officer of Aspen Funds.
“You really would have to be at about [the $2.5 to $5 million] net worth range to really be able to live a comfortable lifestyle and potentially retire,” he added. “Part of the challenge is inflation, that’s going to continue to reduce the purchasing power of the dollar… so it shortens the time horizon on how long that lasts.”
How To Build Your Net Worth
If you haven’t hit any of the milestones mentioned above, it doesn’t mean you can’t in the future. Here are some tips from financial experts on how to build up your net worth.
Start with the foundational investments.
“When it comes to building wealth, it’s important to start with the foundational investments, like an emergency fund and insurance,” said Gerald Grant III, retirement planning specialist at Equitable Advisors. “Typically people like to start with the sexy stuff, like stocks and real estate, but it’s important to build from the ground up. By establishing an emergency fund, it will allow you to create your own bank. This will provide you access to capital in the event of needs and minimize your risk of accumulating bad debt.”
Stay financially disciplined.
“Increasing your net worth is a process that involves disciplined saving, wise investing and vigilant expense management,” said Sammie Ellard-King, personal finance advisor at Up The Gains. “Maximize your contributions to retirement accounts, diversify your investments to spread risk and live below your means. It’s simple in theory but requires determination and discipline in practice.”
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