Recently, my brother and I were joking about our finances and investing. We both finished our studies and are looking forward to our career.
He asked me about investing and where and how to start. I told him, with a smile on my face, that he can read this on my blog later but he insisted for a quick solution.
He was always that type of person that wants fast results with the least effort of time and energy. On the other hand, I’m a person who likes to dig into a topic and absorb any information that is available. I really want to work hard for my success and even if I would fail to beat the market, I would have been incredibly proud for making a profit with my investments.
Later, he tried to ‘outsource’ his investments by asking me to buy the same stocks for him as I’d buy for myself. I refused as I think no one will take care of your own money better than yourself and I also don’t want to be responsible for potentially bad results.
As the conversation moved on, he asked me ‘How long does it take until we are rich?’. I told him, that it’s unrealistic to become rich. Maybe we should start by becoming wealthy in the first place. So his follow up question was ‘How long does it take until we are wealthy?’. I answered ‘when do you consider yourself wealthy?’.
He told me, that he wants to buy a house for himself and his family to settle down. Well, that sounds manageable. I advised him, he should definitely plan to invest for roughly 15 years and then he should pretty good to go for a decent down payment. He had to leave and so our conversation ended abruptly.
I think wealth can only be defined by yourself, your dreams and plans for your life. Though, I asked myself what does wealth means to me?
What does ‘wealthy’ mean?
At first, I really had no idea on where to start with my own definition. I started by thinking of concrete dollar values. Am I wealthy when I have $1,000,000? $2,000,000? More or less? All of them does not take expenses into account. So this wasn’t enough. A little clueless I went onto my favorite (as it is the only one) social media platform. On Twitter, I asked right away what people think. MickeyMoneyChat was nice enough to provide a great starting point.
— MickeyMoneyChat (@Mickeymoneychat) October 17, 2017
Well, I actually have to agree that this is a pretty good definition.
This answer has three valuable insights.
- What happens if you lose your income? This is actually very important because at some point in life (retirement) you will lose a decent amount of it.
- You can have multiple income streams.
- You are wealthy if you could live for the rest of your life of your savings.
Anyway, there was something missing. Concreteness. What does the rest of your life mean? I am 27 right now, how long is the rest of my life and how much money do I need for the rest of my life?
There is no way you can calculate these numbers. But the answer reminded me of a very good book and in it, I finally found my definition.
I am talking about Rich Dad Poor Dad by Robert T. Kiyosaki.
My actual definition of ‘being wealthy’
I browsed through this book instantly and found my definition. Actually, it was his definition, but he has borrowed it from R. Buckminster Fuller himself, so I guess it’s okay to call it mine also.
Wealth is a person’s ability to survive so many number of days forward – or, if I stopped working today, how long could I survive?
Let me break this down for you in an example.
If I have $15,000 in savings and stop working today with monthly expenses of $3,000, how long could I survive?
x = $15,000 / $3,000/month
x = 5 months
This definition solves most of the problems. Here are the insights from it:
- What happens if you lose your income?
- You can have multiple income streams.
- You are wealthy if you could survive for the rest of your life without working again.
- Concreteness. You can calculate the value how long you could live from your money.
But what is a good value with this equation? How many months are equal to wealth? It still lacks one variable to finish the definition. How many months do you have left?
Two things I have to tell you now.
First, no one can tell you that and it’s different for all of us.
Second, and even more important, you don’t need that value.
Let me talk about the latter. If you have multiple income streams besides your day job and they cover all of your expenses on a monthly basis you could live forever. It’s just not important how many months you have left.
Again I will use an example. You have expenses of $3,000 and stocks that pay out $1,000 in dividends per month. You also own real estate that generates another $2,000. The savings are equally as before with $15,000.
How long will these $15,000 last? In theory, infinitely. You will cover all of your expenses with your income from stocks and real estate. You savings never get touched.
Sure, this example doesn’t consider stock market volatility or times when your real estate is not rent out. Though, the most important thing and key takeaway here is that you can build a passive income that will cover all your expenses and you will probably don’t have to worry about losing your job again.
There is another benefit if you live after this definition. You will remove yourself and your health from this equation. You can’t influence your health as much as your investments. There are external factors that you have no impact on. But the equation works fine if you build a great portfolio of investments (I’m not just talking about stocks). The more streams you have, the less likely it is to lose a big part of your income.
For me, this is the state at which you can consider yourself wealthy. You don’t rely on one or two income streams and you don’t have to care if you lose your job. This is financial independence. You don’t have to work anymore. However, you still could and improve your financial situation even more.
What actions can you take to become wealthy?
So you may ask, what do you have to do to achieve this point? How can you cover all of your expenses with multiple income streams? Well, there are several ways of doing it.
Side hustles are great as they are easy to start. They can range from designing a website over walking with dogs to using Uber to take people from one place to another. Though, all of these are active income streams. You trade your time for money. Passive income streams also trade some of your time for money but they do this upfront. Mostly, passive income is also capable to last for a longer time. Examples are creating an e-Book, producing an affiliate website or building a business that is based 100% on outsourcers and you only take a look at your bank account growing monthly.
However, passive income streams take a longer time to build and need a lot of work. I will refer to guides later, as soon as I have something to share with you. For now, check out Nick Loper’s Site Hustle Nation. He writes a great blog and talks also on his podcast about different forms of active and passive site income.
Investments are an easy way to create passive income. You ‘just’ have to pick stocks and eventually they will grow and provide you some monthly income via dividends or you trade them from time to time and making money with it.
Be careful here! You should know what you are doing and take a look at my investing posts to start. Don’t just throw your money into the stock market blindly as you won’t earn any money with this strategy.
Another form of investing is buying a rental property. You can buy a house and earn an income from the rent. However, this also shouldn’t be done without further knowledge. I can’t provide much of a value for most of my readers here. I’m living in Germany and the real estate market is different in every country. If you are from the USA take a look at Bigger Pockets or REITips.
Lowering your costs
Okay, I have to be honest, this won’t generate any income stream for you. Though, with fewer expenses, you don’t need that much income. So this will fasten the process if you start investing and/or create a side hustle.
It’s also dangerous to add an extra income as many people start increasing their expenses likewise. Don’t fall into this trap. The more liabilities you add, the longer you have to stay in the Rat Race.
For lowering your expenses, I have already set up a great guide for you.
I hope you enjoyed this post and this definition will help you to take action. Let me know if you are already into one of these topics or want to dive into one of them by leaving a comment below.