Becoming rich isn’t easy, especially if you’re starting from scratch and not getting an inheritance. It takes a lot of hard work. But as it turns out, it’s almost just as hard to define what being rich is.
If you’re thinking, “Am I rich, or merely really well off?” and you’re stressing over that question, you aren’t likely to get any sympathy from your family and friends – unless they are all rich, too.
But if you're wondering how to define being wealthy, the question can be an interesting intellectual exercise. So if you're wondering if you're rich, there is a lot to consider.
Rich vs. Wealthy
What’s the difference between being rich and being wealthy? The words don't really mean the same thing, according to many personal finance experts. Still, everything is subjective with these terms.
Most personal finance experts tend to equate wealth with financial freedom.
Some experts think that you’re wealthy if you don’t have a lot of debt and you have enough income to do what you want. You could consider yourself wealthy even if you have a pretty low income. That's provided you have a decent amount of revenue stashed away in your savings account, you never really struggle to pay your bills, and you’re able to spend pretty freely if there’s something you want to buy. In that sense, you could be wealthy without being rich.
"There are many semantics around the term 'wealthy' – and varying degrees and definitions," says Doris Meister, CEO and chairman of Wilmington Trust, a wealth and investment management firm in New York City. "For example, an individual’s wealth can be defined by the conditions in which they live. Someone can be wealthy living in a smaller city or less expensive state and therefore be able to achieve a luxurious lifestyle. Those with a similar income in an area with higher expenses could potentially be struggling to make ends meet. Numbers alone don’t tell the full story."
Some personal finance experts say that being rich is a scenario in which you make a lot of money through your salary or investments. However, you may actually have so many debts weighing you down to the extent that your freedom to spend freely is somewhat curtailed. If that’s the case, you’re probably rich but not actually wealthy.
Of course, for some people, there's no debate. Some people are rich, wealthy and all of the other adjectives that describe having a lot of money.
"When you get to a certain stage of wealth where you have excess capital – making more money than you will ever spend in your lifetime – then that is truly wealthy," Meister says.
Net Worth vs. Income
These are two concepts that help to define whether you’re rich or wealthy. Your net worth is the total of your household’s assets, minus the debts. It’s definitely possible to be rich because of your net worth and not due to your income.
For instance, you might pull in a paltry salary but are also sitting on a sizable inheritance. Or you could be "property rich" and own a parcel of land that would fatten up your bank account if you sold it.
There really is no arbitrary number or threshold you reach or definition that officially means you are "rich," according to Meister. She says that it's up to everybody to define that individually.
"For example, some people want multiple pieces of real estate, some want boats, to donate to philanthropy or invest in art," Meister says. "Ultimately, being wealthy is knowing that you can achieve the objectives that fulfill you by smartly investing your financial resources."
Standards of Wealth
As noted, it’s often a judgment call as to whether you can think of yourself as rich, wealthy, well off or poor. But there are some standards of wealth that can typically tell you how you are doing.
How much is in your bank account?
Each year, the financial services company Charles Schwab puts out a report on how Americans think about saving, spending, investing and being wealthy. Schwab’s 2022 Modern Wealth Survey, which surveyed 1,000 Americans ages 21 to 75, revealed that it takes a net worth of $2.2 million to be considered wealthy.
This $2.2 million figure is, again, highly subjective. The average net worth of U.S. households is $121,760. So if your net worth is higher than $121,760, but nowhere near $2.2 million, you are obviously doing pretty well compared to many Americans.
The same Schwab survey, incidentally, found that the 1,000 respondents concluded that if you have a net worth of $774,000, you are “financially comfortable.”
How is your retirement looking?
Again, how much you currently have in your bank account doesn't necessarily indicate whether you're rich. A big part of being rich means whether you’ll be able to retire when you want and, once you do retire, whether you’ll be able to live comfortably, according to Evan Potash, a Philadelphia-based wealth management advisor with TIAA, a financial services organization.
"Most people expect financial professionals to discuss retirement in terms of investment returns and want you to answer the question, 'What magic number does my nest egg need to hit for me to retire?'" Potash says. "Instead, you should turn that question around and ask, 'How should we plan for savings that will last the rest of my life?'”
So if your retirement is looking good, you may not feel like you’re wealthy yet, but you may have set yourself up to be rich in the future.
How much are you paying in taxes?
If in 2022 you earned at least $539,901 a year, then you’re in the top tax bracket of 37%. Married taxpayers filing jointly must collectively earn $647,851 to be in the top tax bracket. If you’re pulling in that sort of income, most people would probably say that you are rich.
How are your investments?
“Rather than focusing on being rich, I encourage clients to think about being financially independent. You are financially independent when you can safely take enough money from your investments to pay your regular expenses,” says Jay Zigmont, a certified financial planner and the founder of Childfree Wealth, a life and financial planning firm based in Water Valley, Mississippi.
He says that generally, people who try to live off of their investments try to live off of no more than 4% of their investment income.
If you can do that, Zigmont says, “you may not think you are rich in the classical sense, but you do have enough money to do what you want. You gain choices and flexibility, which is really the point of being rich. You may not be able to afford a private jet, but you have enough money that if you hate your job, you can leave it.”
Determining whether you are rich, wealthy, poor or in between isn't scientific, although it does require some math. Still, these are labels that are easy to get hung up on, and it may not matter all that much how you define your financial situation. If your managing your money doesn't stress you out, you're probably at least living a lifestyle that you consider financially comfortable, and there's a lot of value in that.
