How to Measure Wealth


Have you ever heard someone say, “Those people are so rich?” Of course you have. I have too. But what does than mean? Can we really “recognize” wealth? Or do we have some misguided notion about the trappings of wealth? Nice cars? Nice clothes? But do these things equal wealth?

Photo by Erik Mclean on Unsplash

We often hear rumors of a person being rich. Sometimes what they are talking about is that the person has “stuff” that they don’t have. That is, the typical individual defines wealth based on income (or at least perceived income) and their “stuff.”

Who could blame people for conflating “rich people stuff” (let’s call it RPS) with being wealthy? After all, the Government often defines wealth based on income. Even President-elect Biden says he won’t raise taxes on people who make less than $400,000. That’s using income to define wealth.

When we see “stuff,” the person may not even have a high income… rather, he might have high debt! Using debt to have RPS is very doable if the person has a regular income and a good FICO score. Borrowing money to buy RPS to “look rich” is a way of life for many in the Western World.

So if not RPS, what is the proper way to measure wealth? Two words… net worth! Net worth is what we get to leave behind to our heirs. In a nutshell, net worth is the value of our assets (or stuff) minus our liabilities, or how much we still owe for our stuff.

People can have lots of RPS. But if they are in debt for it all, they might have a low (maybe even negative) net worth. They are not rich. And their heirs certainly don’t want to pay off their debts with their estate proceeds. But that can happen.

According to MarketWatch, the median net worth of American households is just $97,300. And it is positively correlated with level of education. (Note: that doesn’t mean going to college makes an individual rich. That would be another example of ecological correlation. There is just a positive association between net worth and education, in general.)

In fact, according to Ramsey Solutions’ data, everyday millionaires are more closely tied by their 401(k) investing habits than by Cadillacs and yachts. Everyday millionaires are people have learned that money not going out the door to “look rich” can be invested to make them “really rich” — with high net worth.

As always, thanks for reading. If you’d like to learn more about things like net worth, shoot us an email to questions@marknoldy.com. Or text me at 570-731-0425.

Mark

Hey, there. I'm Mark... I teach statistics and personal finance to high school and college students. I'm also a Ramsey Solutions Master Financial Coach. I create content about financial education... things like: budgeting, investing, and eliminating consumer debt.

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