In the financial services industry, levels of wealth have been broadly categorised to allow for meaningful comparison between groups, and to assess suitability when planning for investments and other uses of capital. Of course, we can expect these figures to be revised upwardly over time (due to inflation) but for the time being our peers would likely have no issue with using the following as a starting point for comparison:
100,000 USD+ in investable assets = Mass Affluent
1,000,000 USD+ in investable assets = High Net Worth Individual (HNWI)
10,000,000 USD+ in investable assets = Ultra High Net Worth Individual (UHNWI)
As for those with less than 100,000 USD in investable assets, you ask? You have yet to enter the arena. Save more. The average person in a developed nation, with a university education, earns approximately 2 million USD (or equivalent) in their working lifetimes. How much of your money hits your savings account compared to the amount that gets spent? For you to enjoy a level of financial stability which is above average, you will be required to save more than the average person.
for those in countries without access to pre-tax savings accounts, the climb may be a little bit steeper. Your financial advisor should be able to help you assess alternatives. We would also recommend you question whether or not property purchase makes financial sense for you in your situation; after all, most people will buy a home using a mortgage which, owing to the interest payable, is a debt long before it becomes an asset.
If you have ever had the opportunity to talk to a rock climber they will tell you that when you are scaling the side of a mountain and you look up, the only difference between 10 meters and 100 meters is perspective. Wealth is not dissimilar to this. Very often, it is not as simple as the categories above, and in its essence, wealth is not even quantitative. The man with 1000 dollars is envious of the man with 10,000 dollars. The man with 10,000 dollars looks at the man with 100,000 dollars and perceives him to be “richer” or better off. Strangely, the man with 1,000,000 dollars likely considers himself to be less wealthy than the man with 100,000 dollars, as he is busy looking at the man with 10 million dollars (indeed, geometrically the difference is still x10, but turning 1 million dollars into 10 million is exponentially more difficult than turning 10,000 into 100,000). The man with 100 million dollars is intimately familiar with the concept of wealth at this point, and would feel humbled if thrown into conversation with a group of billionaires. So, whats the point if nobody feels wealthy? People waste a lot of time researching the habits of successful people, tips to become a millionaire and pretty much any variation of the secret formula to becoming rich. The truth is that there is no secret formula. There is however an interesting chicken-or-the-egg type paradigm where it comes to the difference between people who have money, and those who are wealthy….
The Time Value Of Money
If you ever covered economics during your school years you will remember that money has a time value. In short, because money commands interest, a dollar today is preferable to a dollar in a years time. The tacit understanding here, is that if you had that dollar for one year from now, you could earn interest upon it and at the end of that one year period, you would have more than one dollar. This relationship between time and value of money is addressed when we speak about opportunity cost; e.g, all of the Japanese yen that has been accumulating in your Japanese bank account for years earning 0.01% p.a could have potentially earned more interest than that elsewhere had it been invested, or used to buy another asset. If you could have earned 1% elsewhere, the profit that you missed out on is looked upon as a loss; an opportunity cost.
Now, this is all well and good. There are no doubt few wealthy people around that do not understand the relationship between time and the value of money. Even the non-wealthy, if they are financially minded, will be aware that money can be used to produce more money by investing, can be exchanged for labor and services, or foregone altogether in consumption; buying things. Everybody is comfortable with the time value of money. The difference between the rich (those that have an ample supply of money) and the wealthy, is that the wealthy understand not only the time value of money, but the money value of time.
The Money Value Of Time
People often become rich because they are specialists at something and that specialism demands a premium, i.e. if you are really good at something, especially something that is difficult, people will pay you a lot to do it for them. You’ll note that the traditionally highly paid vocations (doctor, dentist, lawyer, accountant…) are not easy. There is a clear correlation between remuneration and difficulty in the labor market. The defining moment at which a “rich” person is able to transition into becoming a “wealthy” person is whereby they start to utilise and leverage the specialised knowledge of third parties. What do we mean by this?
A rich person may spend their time researching a temporary problem and its various solutions so that they can handle it themselves (because they are likely intelligent, and competent in most pursuits if they are well informed..). If we imagine that a wealthy person earns 200 USD per hour, and spends 100 USD per hour on an expert to fix their problem we could summarise that the wealthy person loses 250 USD, (15 minute conversation with the expert and x2 hours of the experts time). If we then imagine that the rich person also makes 200 USD per hour, but instead chose to spend 10 hours researching the problem, and the following trial-and-error in implementing the solution, they have foregone 2000 USD. The wealthy person solved the same problem for 250 USD. That’s a saving of 1750 USD or 87.5%. Wealthy people understand that they benefit most by sticking to their own specialism and retain all of their bandwidth (time, emotional and intellectual engagement) to apply to the activity that makes their money. If you then apply this rationale to your own life, over time considering all of the “problems” that will invariably present themselves that will require your time and intellectual involvement, it is not difficult to see that the leverage of specialised knowledge will save you money, and enable you to make more money elsewhere. It comes as no surprise then, that the wealthy understand the money value of their own time. It is impossible to say whether or not this is a common trait among the financially successful, or simply a function of becoming wealthy. This discussion is only had among the financial advisors and wealth managers who steward their money. The clients are busy doing other things.
– Report on the Economic Well-Being of U.S. Households in 2015
– PwC Wealth Management Report 2016
– PwC 2016 Wealth Management Trends
– EY – Global Wealth Management Survey 2016