Wealth And The Problems With Too Much Beer
Reading through my posts, I realized one blunder that I’d made. Some weeks ago, I’d started talking about the difference between being rich and wealthy but while I covered the rich and talked of assets and liabilities, I never did get around to discussing wealth.
In the context of money, wealth is basically the measure of how much you own. If you own enough assets, you are wealthy. If you don’t have enough, you are not wealthy yet.
That’s fine, but what’s enough? Too much of a good thing, even wealth or beer can be disastrous as this man is about to find out:
I’ve read finance books that say that you’re wealthy when you have assets to the tune of ten times your expenses. Personally, I think that’s a risky way to count your wealth as you may wind up with less than you really need when the markets crash again.
I like this idea better: You’re wealthy when you have enough assets to immediately cover ALL of your expenses until you die.
For Mr. Beerver, that would mean being able to cover about 60 years of expenses. If he spends 50,000$/year in the future, he would need 3 million dollars to be wealthy today. That would be a very safe amount of money to have and be reasonably assured of not running out of cash before he dies. The advantage of this approach is that the target number gets smaller with each passing year and that it’s a number that’s easy to figure out.
I think of this as the water-mark between being wealthy and being way too rich. It’s the ceiling on what you should try to get. Anything beyond that is just money that you can’t reasonably spend in your lifetime and just represents a waste of the time you took to acquire it instead of having some good, clean fun. There’s only so much beer a man can drink before things start to get ugly. Wealth in moderation is what we’re aiming for here. We don’t want to get stuck in same predicament as the poor guy in today’s video
So now that you know your upper-limit, let’s turn to a number that’s less depressingly huge.
My favorite approach to calculate wealth is based on monthly expenses and goes like this: Mr Beerver will be wealthy when his monthly passive income equals his monthly expenses. From that point forward, he is wealthy!
Unfortunately, Mr Beerver only made 647$ of passive income last year. That’s 53$/month. Also, for added safety I like to count only half of this income as steady and reliable income. So, if Mr Beerver can live off of 26$/month, then he’s already wealthy!
Uh… that doesn’t even cover one month’s beer-tab (as discussed here). Guess he’s not wealthy yet!
He needs to get 8,400$/month of passive income before he can feel truly wealthy. Wow, that’s still a very big number! Mr Beerver will have to work real hard at his job for many years to come. I personally believe that to be a good thing. Long hours of hard work are not a bad thing at all. They help you appreciate what it takes to make a dollar and hopefully make you less likely to waste a dollar as you know how much sweat and blood goes into one.
There’s one more thing I’d like to touch on today. After recommending NNVC at 4.91$ a few weeks ago, the price went right up to 6.50$, making me feel like a genius just before it crashed back down again earlier this week to 4.84$, making me feel somewhat less smart.
THIS is why investing can be tough on people. The ups and downs can be momentous and they bring with them a flood of feelings that in most cases are not very helpful in managing a portfolio. I’ll talk about this more later.