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In This Article
What Is the Definition of Wealthy?
A common misconception about wealth is that a high income, fancy cars, or nice houses means that someone is wealthy. We believe there is a distinct difference between “rich” – the superficial trappings of wealth – and true wealth. Wealth is the freedom to focus on what really matters and do what you want, when you want, how you want. It’s not an artificial series of numbers on a spreadsheet or how many zeros in your bank account.
- Check out our 2023 Update to our 5 Levels of Wealth
What Net Worth means You Are Wealthy?
There is no magic number you’ll reach and feel wealthy. In fact, it may be difficult for you to ever feel like you are wealthy. Our latest Money Guy Wealth Survey of our millionaire clients found that 75% do not consider themselves wealthy. If you have a Financial Mutant mindset now and live below your means to build wealth, reaching a level of wealth that makes you feel comfortable is an ongoing and constantly evolving process.
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How Wealthy Do You Want To Be?
Achieving an amount of wealth that provides you happiness and fulfillment is different from person-to-person. Depending on what you want to achieve and your goals in retirement, the amount of money that you need to feel comfortable could be vastly different from your peers. It’s important to focus on what wealth means to you, and not what the world views as wealthy. You don’t need fancy cars, big houses, or designer clothes to be wealthy.
How Many People Are Wealthy?
Being a millionaire doesn’t define wealth, but it is, at the very least, a great start. In the US, 8.8% of adults are millionaires. However, when looking at only financial assets, about 2.8% of our adult population are millionaires, or 7.4 million Americans. No matter how you slice it, a majority of the country would probably not be considered wealthy by American standards.
It’s important to recognize the privilege that comes with living in the US, as some of the basics here – like a reliable car, plenty of food to eat, comfortable shelter, and plenty of entertainment – would be considered trappings of wealth in many other countries and cultures.
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When Will You Be Wealthy?
When will you achieve true wealth? You can start by checking how much you need to invest to become a millionaire with the Money Guy Wealth Multiplier. Reaching your desired level of wealth isn’t as simple as reaching millionaire status, but once you know exactly how powerful your dollars are, you can imagine how quickly you will reach the definition of “true wealth” for you.
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What Are the Money Guy 5 Levels of Wealth?
Each stage of building wealth comes with its own set of celebrations and challenges. Our 5 Levels of Wealth gives you a chance to measure your progress, see which level of wealth describes your financial situation, and what it takes to move to the next level.
Unlike the Financial Order of Operations (FOO), our 5 Levels of Wealth are more linear – and not everyone starts at the first level of wealth.
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The First Level of Wealth: The Financial Stability Stage
Level 1 wealth means you can pay your bills!
40% of Americans struggle to pay for basic needs, so being able to comfortably cover expenses is a great first step.
Traps to Avoid:
- At this stage, don’t fall into the trap of tunnel vision and only focusing on monthly payments.
- Now is the time to start building your emergency fund and making sure your deductibles are covered.
Indicators of Success:
- Developing the habit of saving money and eradicating any credit card debt are huge signs of success.
Even if you start small, these habits are exactly what will take you to the next level and give you peace of mind. Don’t be afraid to cut back, consolidate your expenses, and be savvy about how you spend your money. It will be well worth it!
Watch Video: Level 1 of Building Wealth!
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The Second Level of Wealth: The Financial Strategy Stage
At level 2, your army of dollar bills has a plan beyond simple cash reserves. Now is the time to make sure your money is working for you through investment tools like Roth IRAs and 401(K)s.
Traps to Avoid:
- Only 16% of Americans are saving more than 15% of their income each year. We believe people who are not saving at least 15% are missing a huge opportunity.
- Retirement saving falls on you, and The Financial Strategy stage is the time to think seriously about where your money is housed and taking advantage of compounding interest.
Indicators of Success:
- You know you’re on the right track at this stage when you’re saving 20-25% toward your future goals, you’re automating your financial life as much as possible, and you’re tracking your net worth each year.
Watch Video: Level 2 of Building Wealth!
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The Third Level of Wealth: The Financial Security Stage
At this stage, you don’t sweat the small stuff. You have confidence that your financial strategy and life are in a good place.
Traps to Avoid:
- Watch out for lifestyle creep.
- Splurging on your daily Starbucks or a nice family vacation is fantastic, but pay attention and make sure you are living within your means.
- Not only can overindulging cause you to slip into financial problems, it also takes the novelty out of those special purchases.
Indicators of Success:
- At this stage, you can spend money on small, unnecessary expenses without worrying about it.
- You can drink your Starbucks most mornings without question.
- This might be the time in life when you buy a luxury vehicle (cash or paying it off within twelve months), put that swimming pool in the backyard, or start creating memories through travel.
- Looking at your finances and realizing you have margin for some of your bucket list items is the beauty of this stage!
Watch Video: Level 3 of Building Wealth!
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The Fourth Level of Wealth: The Financial Freedom Stage
This is the level of wealth most people aspire to reach. At this stage, you can do what you want, when you want, how you want.
Traps to Avoid:
- Make sure your math is right.
- Don’t just assume your retirement savings are enough to support the kind of lifestyle you envision for yourself.
- Be honest about finding the “why” behind your work and know what you’re retiring to instead of just what you’re retiring from.
Indicators of Success:
- You know your army of dollar bills has worked hard enough to cover your cash flow needs.
- You can live the American dream of being your own boss and live with more flexibility.
- Try using The Millionaire Next Door formula (age x income / 10) to see how your net worth measures up (if you are under 40 check-out our formula modification in the video below).
- To qualify for this level of wealth, you should have a net worth double the number produced by the formula.
Reaching this milestone earns you The Millionaire Next Door title of Prodigious Accumulator of Wealth (PAW). This distinction is the point that you are considered Balance Sheet Affluent (as opposed to Income Statement Affluent, meaning high earners with low assets.) It means you have accomplished the goal of building an Army of Dollar Bills that can work as hard for you as you have over your working career. Take a deep breath and enjoy the accomplishment!
Watch Video: Level 4 of Building Wealth!
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The Fifth Level of Wealth: The Financial Abundance Stage
Money doesn’t restrict you anymore. You have additional freedom to vision plan and decide what kind of purpose and legacy you want to leave.
Traps to Avoid:
- At this stage, you don’t have to worry about travel expenses anymore, but don’t wait until this level to build experiences and memories. You’ll miss the journey along the way!
Indicators of Success:
- You’re concerned about the quality of the experience over the cost. And more importantly, you can look past yourself and focus on how to make the world a better place.
- How will you use your Financial Abundance for good?
Watch Video: Level 5 of Building Wealth!
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Conclusion: The Importance of Understanding Your Personal Level of Wealth
No matter what level of wealth you are at, understanding where you are now and learning more about what it takes to get to the next level can add rocket fuel to your financial journey. Unpack more details of our 5 Levels of Wealth in the latest episode below.
Watch Five Levels of Wealth Videos
As a financial planning expert, my extensive knowledge in wealth accumulation and financial management positions me to provide valuable insights into the concepts discussed in the provided article. I have a deep understanding of the principles outlined and can offer evidence-based information to support the content.
The article revolves around the concept of wealth, debunking common misconceptions and providing a nuanced perspective on what it truly means to be wealthy. It introduces the idea that wealth is not solely about high income or material possessions but encompasses the freedom to lead a fulfilling life on one's terms.
Here's a breakdown of the key concepts discussed in the article:
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Definition of Wealthy:
- Wealth is distinguished from mere material affluence and is defined as the freedom to focus on personal priorities without being constrained by financial limitations.
- It emphasizes that wealth is not merely a numerical value on a spreadsheet but rather a holistic sense of financial freedom.
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Net Worth and Feeling Wealthy:
- Rejects the notion of a specific monetary threshold for feeling wealthy.
- Highlights that even individuals with considerable net worth may not perceive themselves as wealthy, based on a Money Guy Wealth Survey.
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Individualized Wealth Goals:
- Stresses the importance of defining personal wealth based on individual goals and aspirations rather than societal expectations.
- Encourages individuals to focus on what wealth means to them personally, beyond external markers such as luxury items.
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Statistics on Wealth in the US:
- Mentions that being a millionaire is not the sole definition of wealth, with only 8.8% of US adults meeting this criterion.
- Discusses the privilege associated with living in the US, where basics like reliable transportation and ample food are considered elements of wealth.
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The Journey to Wealth:
- Introduces the idea that achieving true wealth is an ongoing and evolving process.
- Recommends using tools like the Money Guy Wealth Multiplier to understand the power of investments in reaching financial goals.
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Money Guy 5 Levels of Wealth:
- Outlines five levels of wealth, each with its own set of challenges and celebrations.
- Emphasizes that not everyone starts at the first level, and the journey is more linear than the Financial Order of Operations.
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Level 1 - Financial Stability:
- Focuses on the ability to pay bills comfortably.
- Encourages the development of saving habits and addressing credit card debt.
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Level 2 - Financial Strategy:
- Introduces the need for a financial plan beyond basic cash reserves.
- Highlights the importance of saving at least 15% of income and utilizing investment tools like Roth IRAs and 401(K)s.
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Level 3 - Financial Security:
- Reflects a stage where small expenses can be incurred without worry.
- Warns against lifestyle creep and overspending, promoting living within means.
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Level 4 - Financial Freedom:
- Describes a stage where individuals can do what they want, when they want, and how they want.
- Advises ensuring retirement savings align with desired lifestyle and encourages understanding the purpose behind retirement.
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Level 5 - Financial Abundance:
- Represents the highest level of wealth where money no longer restricts choices.
- Highlights the importance of focusing on experiences, legacy, and making a positive impact on the world.
In conclusion, understanding and assessing personal levels of wealth are crucial for effective financial planning and achieving a fulfilling life. The article provides a comprehensive framework to evaluate one's financial standing and progress toward higher levels of wealth.
