A few weeks ago Joe from Retire By 40 wrote a great article: When Will You Feel Rich? He explained the following:
[Side Note: Joe noted in his article he was talking about money, not rich in friendships and good health. We’ll do the same.]We’re doing quite well financially, but I don’t feel rich at all. Our net worth is over $2 million, but the majority of that is in our retirement accounts and real estate. We could access them if absolutely necessary, but it’s not exactly liquid like money in a savings account.
Our net worth isn’t $2 million, but I’d say we are doing well enough financially. That’s a relative feeling anyway. In showing my wife our monthly net worth, she said something to the effect of, “It certainly doesn’t feel like we have that much money.” If I didn’t know better, I’d think she’s been hanging out with Joe.
And she’s not wrong. Our situation mirrors Joe’s in many ways. If I had a blogging twin it would probably be Joe.
And just like Joe, the majority of our money is in retirement accounts and real estate equity. For the last couple of years, I’ve been keeping track of the percentage of retirement plus real estate equity is of our net worth. It’s north of 85%. Not just a little north of it… significantly so.
Since I don’t share specific numbers, let’s imagine a family with half of Joe’s net worth… $1 million. Let’s also imagine that we were to use a more-conservative-than-us percentage of 80% tied up in non-liquid assets.
That leaves the hypothetical family with $200,000 in liquid assets. That certainly isn’t change, but $200,000 can’t feel like a million dollars… especially when you still have a mortgage a pay.
One Million Dollars is Not One Million Dollars
Let’s rewind the clock 30 years to 1987. I was 10 years old. I had a good concept of money. “Rich” was being a millionaire. That to me meant that you lived in a big mansion and went on beach vacations… perhaps even had a beach house. Maybe that was wrong in 1987, but I was 10. It certainly seemed right.
Two things have changed since then. I’m a little wiser than I was 30 years old. A million dollars is worth $2,144,392.61 according that CPI calculator. So to get that same millionaire feeling, you’d have to have more than $2 million.
When you start to unravel it, the liquid cash for this family (still paying a mortgage) is 10% of the money of what’s necessary to feel rich. This helps me understand what my wife is thinking while the numbers might seem to portray a different story.
I have thought about this as well. My personal thought on this comes from how we feel about our retirement. There is a lot of what you can touch and feel when it comes personal finance and FIRE methodologies. I have felt you have to get to a point where you are not beholden to anyone (or anything such as a bank) for you life. I understand making strategic investments (mortgages, new cars, etc.), but for someone to actually feel wealthy, they have to be able to not be rich in terms of net worth, but actual worth so they don’t owe anyone anything.
I found this article from JD Roth a while back and really liked it. He lists out the stages of financial freedom and I would say you are #3 on his list. You can become FIRE at #5, and at #6 you are just carefree.
http://moneyboss.com/the-six-stages-of-financial-freedom/
I think you are right. It depends on what you value.
As for J.D.’s 6 stages, I find that we are in parts of 3-5. We could pay off our mortgage debt, but choose not to do so as we value the leverage.
We could probably use the equity in our other properties to pay off our mortgage and then use our investments to pay off the limited expenses. It could be argued that is independence.
When all the mortgages are paid off, I would say that we’d be in abundance… except for potential kids’ college expenses.
Every person has their own perspective on how they view a personal journey, which is what makes financial blogging so fun to read. I am more of a completest (maybe that is my gaming background). I feel you are not at each level until you 100% are at that level. You can have more toes in various areas. I am more at the Security level, but I am also older than you and my son is 7 weeks away from graduating college. I am working for the independence level and at this point I am on autopilot for making it in a few years (I have zero debt, and am almost there with retirement savings). You still have many years to go, and appear you are on a great glide path as well.
Hey LM,
Great article! My only problem is the numbers that are being used. I live in a particularly awful area for taxes and would probably need to have a net worth north of $5 million in comparison to the $2 million that Joe has from your other article. The dollars simply don’t stretch here like they do in many other places and it has only gotten sillier as time has progressed.
The interesting thing about the psychology of my generation is they don’t understand what it takes to become wealthy. I believe most of my generation, even in my area, think that $1 million dollars is going to give them security. I also don’t think my generation has any idea how to make $1 million dollars, and something big is going to happen when Gen-X dies because my generation simply doesn’t have the dollars to survive.
I’m not sure what the future holds, but this steady path of inflation mixed with the inability to generate income in the younger generation seems to be similar to a fire getting closer and closer to gasoline.
There’s always the option of moving ;-). Everyone’s circumstances are going to be different. A dollar in Silicon Valley doesn’t go nearly as far as it does in rural Kansas. That’s why I stuck with the national inflation index. It was the best neutral source I could find.
Well, a million dollars certainly goes a lot way to giving people security. I think we need to do a better job showing people how save and invest to get to a million dollars. I have been writing about the “haves” and “have nots” for around 10 years now. It seems like the “haves” are savings and letting compound interest do wonderful things for them. It seems like the “have nots” have had difficulty saving for one reason or another (not necessarily their fault). They can’t get to step 2 of investing.
I agree with the fire getting closer and closer to the gasoline for the younger generation.
I don’t think it’s the liquid cash, I keep enough in FDIC insured deposits to meet the threshold but I don’t feel rich either. A couple of other factors I can think of: (1) if we’re surrounded by people who are on the same plane financially as we are, we tend to feel ‘average’ instead of either rich or poor. Our circle of friends may be a small minority but it looks like the world to us. (2) the slow dime effect– like the frog in the slowly warmed pan of water who never feels the heat. Maybe that’s why despite the growth in my net worth, my spending is the same as it ever was?
Relativity to your peers makes sense. I can imagine some of the minimum-salaried baseball players don’t feel very rich because they are at the bottom of their profession. However, it is a LOT of money compared to the general public.
You have another great point that we limit our lifestyle inflation, which mean that we aren’t spending money like we are rich.