There’s a difference between being “rich” and being “wealthy.” For many, they just envision having money to buy all kinds of toys that they believe would make them happier.
For the wealthy, they look at things slightly differently. The wealthy use their abilities to accumulate enough capital to lock in a minimum lifestyle for the rest of their lives (with or without working a job for money). It’s about three things:
- Controlling their time
- Making their own decisions
- Doing what they want to do when they want to do it
An example of a “rich” person may be a corporate sales professional that is having a few blowout earnings years. They have the income to buy all kinds of luxuries (especially large if they use debt). But the minute that those earnings dry up, the game is over. They either keep running on the work treadmill at faster speeds to keep up with their escalating spending habits or they get spit out the back.
A wealthy person accumulates assets and investments that create residual income streams. It’s these income streams that eventually can sustain the household at a given lifestyle that they deem appropriate. As they proceed through life, they spend less now to create far more freedom later.
So what does it take to reach “wealthy” status? It takes accumulating capital about 20 times your earned income levels. This makes wealth relative to a chosen lifestyle. Lower your lifestyle and you lower your capital needs. If you need $50k in investment returns, then multiply by 20 and you need approximately $1.0 million in capital to pull that off. If you need $500k in investment returns, then multiply that by 20 and you need $10.0 million in capital to pull that off.
Here are two tips to follow on your way to wealth;
- Start with the end in mind. Your goal is to get your capital to 20 times your earnings. Know your goal and develop a plan to get there.
“If you don’t know where you are going, any road will get you there.” – Lewis Carroll
Your wealth should be accumulating throughout your life at a pace that delivers you to the Promised Land at or prior to your desired retirement age. Lay it out on paper and benchmark yourself against your own road map. Maybe your road map looks something like the following age based goals:
By Age 30 – You accumulate 1.0 times your earnings
By Age 35 – You accumulate 2.0 times your earnings
By Age 40 – You accumulate 3.5 times your earnings
By Age 45 – You accumulate 5.0 times your earnings
By Age 50 – You accumulate 7.5 times your earnings
By Age 55 – You accumulate 10.0 times your earnings
By Age 60 – You accumulate 15.0 times your earnings
By Age 65 – You accumulate 20.0 times your earnings (VICTORY!)
- Save at least 20% of your earnings each year. If you can’t save money and invest for your future, wealth will never occur because you won’t be accumulating the very capital you need to sustain yourself when you no longer want to work. If your savings rates are in the single digits, you are loaded up with debt, and can’t seem to find anything left over each month, then that is a big red flag that indicates that although being wealthy sounds attractive, you aren’t doing the necessary things to actually accomplish the goal.
So there you have it. This is the 20/20 vision of the wealthy. They are those that can save 20% throughout their lives and eventually accumulate capital that is 20 times their earned income levels.