When you think about what it means to be rich, specific images come to mind. Maybe you imagine someone on a yacht wearing a Rolex while you enjoy champagne and caviar.
But when you try to define what it means to be “rich,” the concept becomes more abstract; There is no set dollar amount or single physical asset that will definitively make you rich.
In fact, whether you are considered wealthy is largely relative to the value of your income and assets compared to the wealth of other people around you. For example, when determining whether your salary qualifies as lower or higher income, the Pew Research Center considers how much you earn compared to people living in your area with the same family size.
There is no universal definition for what it means to be rich, but there are some commonly understood measures.
If you ask any economist, they may tell you that a person is wealthy if they own capital, meaning they own physical or financial assets that earn them income, such as investments or business equipment.
For others, we can say that a person is rich if their income, wealth and/or purchasing power allows them to easily afford all their needs for the entire duration of their life.
Still, the amount of money required to hit that mark varies widely by location. For example, consider car ownership, which is a function of wealth. In many places, such as the United States, owning a car is a necessity for people who want access to good-paying jobs. Yet it is considered a luxury by the majority of the world.
By that standard, most Americans are wealthy because the vast majority of us (86%) own cars. In some of the world’s other most populous countries, only a small portion of people can afford to own a vehicle. For example, in China the car ownership rate is 22%. In India it is only 3%.
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In the United States, there are certainly people we can consider wealthy by every conceivable measure (certain tech CEOs come to mind). According to a survey by Charles Schwab, Americans believe an average net worth of $2.5 million is needed to be considered wealthy, an increase of 14% from 2023.
However, for most people, wealth is relative to their situation.
For example, let’s say you earn a salary of $208,152 per year, which puts you squarely within the top 10% of wage earners according to ZipRecruiter.
You could say that earning that salary—which is more than three times what the average American worker makes—makes you rich, because it can easily afford the median-priced home in most parts of the country. But that salary is still not enough to afford the average-priced home in Massachusetts, Hawaii or California, according to REALTOR.com.
Furthermore, even if you make around $200,000 a year, other factors like your debt, job security, family size, and medical costs can determine whether or not you’re truly financially stable — not to mention whether or not you’re happy.
Speaking of happiness, the amount of money needed to make us happy also varies. But it is an easier goal to obtain than to be rich. According to a study from the University of Pennsylvania, happiness increases for most people as their income increases, but it plateaus once they reach $100,000 a year.
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There is no single path that leads to wealth, but there are basic principles you can follow to make an easier path. Here are some things you can do to start the journey.
Many people in the US wrongly believe that their inheritance is too small to afford and that estate planning is for the ultra-wealthy. But the truth is that a lack of estate planning among lower-income groups can contribute to persistent wealth disparities.
One of the most important ways to increase your wealth is to strategically plan for the transfer of assets you will inherit. First, that inheritance is taxed at a much lower rate than money earned through work or savings. In other words, estate planning can give you a better chance of growing your wealth beyond working alone.
So if you think you’ll have an inheritance at all, talk to a certified financial planner to see how you can avoid unnecessary delays and taxes being passed on to you.
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Easily affording all your needs may require a bigger lifestyle change. You may want to consider moving to a location where the cost of living is lower than where you currently live, but where you can still maintain or even increase your income.
By doing this, you not only have the potential to reduce your cost of living by as much as 50% or more, but you can also free up more of your income to invest and earn passive income.
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Financial experts often advise people to tighten their budgets to improve their finances. But that’s not the only way to make improvements. Budgeting can get you so far even if your income is limited.
On the other hand, you can often have a much bigger impact if you proactively look for ways to increase your income regularly and continuously.
How do you do this? Despite what you may have heard, attending college is still one of the best ways to ensure you earn the highest income possible.
According to the Bureau of Labor Statistics, people who earn a bachelor’s degree or higher earn significantly more than those who only graduate from high school or even those who earn an associate’s degree.
After college, you’ll see a huge difference in your income trajectory if you look for ways to increase your wages annually.
For example, if your first professional role pays $75,000 per year and you receive the average annual raise (3%), your income will not keep up with inflation. After five years, your salary will only increase to $86,946.
By comparison, ADP of Human Resources Management Software and Services estimates that people who change jobs increase their earnings by about 7% (which is low compared to recent years). If you were currently making $75,000 and immediately switched jobs, your salary would increase to $80,250 this year. If you then negotiated a 5% increase each year, your income would reach $97,544 in five years.
One of the fastest ways to lose money is to use credit cards and take on other high-interest debt. That’s because you’re unlikely to find investments that earn higher interest rates than what you charge on credit card debt; The average credit card APR hovers at almost 23%, while you can expect to earn about 7% to 10% on long-term stock market investments.
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There is a limit to how much you can earn when you exchange your labor for wages, also known as earning active income. If you want to increase your earning power, focus on developing additional, passive forms of income or income earned by putting your assets to work.
Common forms of passive income include:
The sooner you pay off debt and start investing your money, the more time your money has to grow and multiply.
This is due to a principle called compound interest. With compound interest, you not only make money on the amount you invest, but also on the interest you have earned so far. So the longer your money is invested, the more its value can grow.
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Some people take this to mean that there is no point in investing at a later age. Rather, it just means that the sooner you start, the better. For example, if you leave your excess cash in the bank, it usually won’t earn enough interest to keep up with inflation. On the other hand, a diverse portfolio of stocks, mutual funds, bonds and other securities can allow you to beat inflation and grow your wealth, regardless of your age.