Posted by Mike Smith :: March 10, 2008 @ 5:25 amYou would think that being wealthy would be something that could be quantified. Perhaps some threshold of assets, net worth, or positive cash flow would lead to an assumption of wealth. The reality is that, while those quantifiers are important, your relative wealth to those around you may be even more important.
As an example, consider someone who has paid off a $1.3 Million home and has a net worth of $3.5 Million. You might expect this person to be retired and living the good life. A man in this situation was profiled by The New York Times in an article on so-called Working Class Millionaires. He regularly works 70 hours a week and doesn’t consider himself rich. The reason is tied to his location, Silicon Valley, where most of his neighbors are at least as wealthy as he is.
I have a hard time feeling bad for a Silicon Valley millionaire. If I were in this situation, I would probably cash out and move to a more affordable location. There are places all throughout this country that are reasonably affordable and offer whatever you like, be it ocean, mountain, forest, or plain. Such a change might not be easy, but neither is working yourself to death to keep up with the Joneses, particularly if the Joneses are über-rich.
On the other end of the spectrum are the results of happiness surveys where people in poor nations often report being happier than people in the US. The reason is the same: People in poor countries tend to have neighbors who are also poor, so on a relative scale they are no worse off.
Regardless of your relative wealth, being bogged down by debt will not help your situation. Luckily, credit card debt is a problem that can be remedied with a peer-to-peer loan from Lending Club. Paying off your debt more quickly will allow your relative wealth to rise more quickly as well.
The alternative to living where you are wealthy relative to your neighbors is to define wealth in your own terms. Caring less about what people think is one of those changes in mindset that can make all the difference.
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Wealth is not the value of your assets, but rather the cashflow that is produced by your assets. Once your investment income exceeds your living expenses (including taxes), you can live on your investment income forever. You are financially free and don't have to work for a living anymore (unless you choose to do so for nonfinancial reasons).
In practice, of course, you might want to have a margin of safety (i.e., your investment income exceeds your expenses by a considerable amount) to allow for unforseen circumstances (e.g., your expenses increase suddenly or your investment income drops suddenly). But the overall point is that it's the cashflow produced by your assets and not their value that really matters.
To get to the point where your investment income exceeds your expenses, you can both increase your investment income and reduce your expenses. Paying off debt reduces your expenses. So does living frugally. Investing wisely (including lending wisely on people-to-people lending sites) increases your investment income.
Financial freedom does not guarantee happiness. But it can certainly help when you don't have to worry about how you are going to make ends meet anymore.
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