Everyone talks about it… “I want to be rich.” “I want to be a millionaire.” “I want to win the lottery.” “I want to be wealthy.” “I want to have a comfortable retirement.”
But what do we actually mean when we say that? Is a million dollars really enough? How much is truly wealthy?
I came across a great definition of wealth based on Rich Dad Poor Dad that works very well.
“Wealthy” means your passive and portfolio income is greater than your expenses.
In this post, we talked about the 3 sources of income. The last 2, passive and portfolio income, need to be maximized to become less dependent on typical work income.
1. Let’s say you have $2,000 per month in expenses (rent, food, fuel, giving, insurance, entertainment, savings, etc). And you work a job that earns you $2,500 a month, but that is your only source of income. No passive income, no portfolio income. By my definition, you’re not wealthy. Most people reading this blog more than likely fall into this category. At least for now…
2. Now let’s say you write an eBook that sells well and own a rental property, as well as having some investments that earn you some monthly dividends. Just for grins, let’s say the eBook sales are earning you $500 per month, the rental gives a net profit of $300 per month, and your investments earn you $50 per month. This totals $850 in total passive and portfolio income. While not quite up to your $2,000 a month expenses, it’s at least progress! You’re just $1,150 short of being truly wealthy!
3. Ok, so you’ve gotten the hang of finding and acquiring assets, and have really built up your passive and portfolio incomes. Now you own a business that works FOR you (passive income) and earns $1000 per month. The eBook sales have tapered off a little bit, so they only earn $300 per month. In addition, you were able to pay off the the rental property mortgage now netting you a monthly profit of $800 per month total. You’ve also built up a decent portfolio that earns you $200 per month in dividends and interest. So now that’s a total of $2,300 per month. This is above your $2,000 per month expenses! You’re wealthy!!! At this point, you could quit your normal “day job” and still be able to live comfortably as all your passive and portfolio income.
It’s that simple, really. If your passive and portfolio income are higher than your expenses, I consider that wealthy.
How close are you to being “wealthy” by these standards?