Remember when you were a child, imagining what you could do if you won $1 million? You were going to buy a flash house and car, an Xbox, toys and have a holiday somewhere exotic, like Rainbow’s End. Now, a million dollars doesn’t seem all that much – in Auckland, this will barely get you a home. So how do you know if you’re rich?
Are you rich?
In NZ, the average household is worth around $300,000. The top ten percent, our wealthiest Kiwi households, are worth upwards of $1.4 million. But experts don’t believe that naming a precise dollar value is the way you can predict wealth. People’s standards and styles of living influence how far their funds go – Victoria Beckham allegedly spent over $1 million in an afternoon while shopping in Milan – but your average Kiwi could stretch that out to last a very long time.
We often make assumptions about someone’s wealth based on external appearances. We see the Mercedes Benz, the Remuera address, the designer clothing and Instagram images of yet another exotic tropical holiday, and equate it all with wealth. What we don’t see is the eye-wateringly high mortgage, personal loans and maxed out credit cards. We’re often surprised to discover a high income earner,who seemingly has it all, is actually bankrupt.
So it seems wealth isn’t so much about how much you’ve got or earn; it’s what you do with it that counts. Maybe Scrooge McDuck had the right idea – look after your expenses and save your money!
How long can you survive?
Derek Sall, a finance blogger,maintains that wealth is about how much money you can save relative to your needs. For the litmus test of wealth, he asks: If you lost your job tomorrow, how long could you survive off your savings?
A month or less: Broke
One to three months: Teetering
Three to six months: OK
Six months to two years: Well-off
Two to five years: Wealthy
Five or more years: Ultra-wealthy
Wealth varies from person to person because someone with dependants and a high cost of living will not be able to survive as long as someone who lives frugally. Everyone has a different set of circumstances as one man’s ‘rich’ may be another man’s ‘poor’.
Get wealthy and start building an emergency fund
If you want to be truly wealthy; save. An emergency fund should be something that is an integral part of your weekly budget. It is designed to be there for those unexpected life events; a fridge replacement, car repairs or an illness or accident that means you can’t work. Aim to have saved around six months’ worth of living expenses. This means that if you are unable to work, you can still pay your mortgage, still retain your home and other assets and still have a comfortable lifestyle for a time period that allows you to get back on your feet.
Consider some form of income protection too; this can be insurance, or an investment that provides income regardless of whether you are working or not, such as a rental property.
What is wealthy for YOU?
You need to decide what is important to you. If your dream is to swim through gold like Scrooge McDuck (ignoring the improbable physics of swimming through solid gold coins), then you are going to need to start making some serious gold investments. If you are more of a cabin-in-the-woods type, wealth is going to mean something different.
You need to look at your lifestyle and your future goals and dreams and decide what is going to work for you.
Feeling rich and actual wealth are not the same
The truth is that having money doesn’t necessarily make you feel rich.
Are people with a lot of money happy with their wealth? Are they satisfied and do they feel like they have enough? Jolanda Jetten, a social psychologyprofessor and co-author of “The Wealth Paradox”, says no.
“The more money you make, the more you also have a need for more money – it’s like an addiction,” she says.
She goes on to state that high income earners often become defined by their wealth. Even if they feel unhappy, they feel powerless to change their circumstances, trapped by their own lifestyle. They compare their lives to Mr and Mrs Jones-next-door and analyse their possessions and wealth and feel pressure to conform – or outdo- their contemporaries.
Even Lotto winners don’t feel any happier with their lives after the sudden windfall. In fact, winners of Lotto are more likely to be worse off thanbefore they won, five years down the track. Money will not make you happy.
Has wealth got anything to do with money?
After a certain point, money doesn’t add any extra happiness to your life. Money can’t buy happiness and it won’t magically make your life better. Once you can comfortably survive, have created an emergency fund that provides asset protection and some form of income protection, any money over and above that amount will not provide extra happiness. Globally there is a shift from seeing a car or house as a symbol of wealth to acknowledgement that being rich in memories is far more rewarding.
In the US, spending on events and experiences has risen 70% since 1987. An increasingly mobile generation are finding that travel is where they spend their money rather than a car or house. Money does not cause happiness, so maybe true wealth does not lie in money, but in a life well lived with people you love.
True wealth is providing you with the life you want
Being wealthy is having enough money so you can do what makes you happy. Money should provide you with the freedom and flexibility you need to chase your dreams. It should be a safety net so that if something goes wrong, you still have options and are secure in your assets.
There’s no magic dollar figure that tells you how much you need to be wealthy, or how much you need to save. You need to figure out your life goals and plans and save accordingly. If you need advice, a financial planner can offer assistance not only with figuring out how much you need, but also how to get there.