Are you rich? It depends on your perspective and definition of what it means to be rich. Unfortunately, many people don't really have a clear definition of wealth, or they confuse having a high income with being rich, when that's not necessarily the case.
If you want to see if you're rich or not, there's a simple and easy way to answer this question: track your net worth. Here is why.
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Examine your net worth to find out if you are rich
If you want to find out if you're rich, the first thing you should do is calculate your net worth. Your net worth equals the amount of money you're worth. It can be calculated as follows:
Add up the value of your assets: assets are items you own that have value and include anything you can sell and turn into cash, such as. B. Yours:
- House
- Cars
- Bank accounts
- Stocks and other investments
- Treasury Bills
Subtract the value of your liabilities: Liabilities are obligations and include any debts, such as. B. outstanding on yours:
- Mortgage
- Personal loans
- Car loans
- Credit cards
To find out if you are rich, it is better to look at your net worth than just your income or assets.
Let's say you make $1 million a year in. At first glance, this may make it seem like you're rich – but if you've taken on a lot of financial obligations and your annual required payments add up to $2 million, you're not rich. You're actually very poor, even though you have so much money, because you can't afford to meet your financial obligations and you're a million in the hole.
Let's say you live in a huge mansion, drive an expensive car and wear a bunch of expensive jewelry. You may look rich. But if you've gone into debt to the hilt to buy these things, you're not actually rich – you're just pretending to be. And in the process, you're missing out on creating financial security for yourself and potentially becoming less wealthy over time.
By looking at your net worth minus your liabilities, you can see how much wealth you have. And if you've acquired enough wealth, you're officially rich.
How much does your net worth need to be to be rich?
Schwab conducted a Modern Wealth survey in 2021 and found that Americans believe you need an average personal net worth of $1.9 million to be considered wealthy. That would mean the value of the assets you own, minus any debt, would have to add up to nearly $2 million.
But you may have a different definition of rich. Some people consider themselves rich when they have a net worth of $1 million, while others wouldn't say they're rich until they've funded $5 million. A lot depends on your expectations. For example, the amountof $1.1 million was much lower than most people reported in the survey. Wealth can mean anything you want it to mean to you.
The bottom line is, once you have a positive net worth (as opposed to owing more money than you have), it's really a personal choice how high that net worth needs to be to feel wealthy. By tracking your net worth, you can easily see if you've reached that goal.
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