Are you rich? That depends on your perspective and the definition of what it means to be rich. Unfortunately, many people don't really have a clear definition of wealth, or they confuse earning a high income with being rich when that's not necessarily the case.
If you want to see if you're rich or not, there's one simple and easy way to answer this question: Track your net worth. Here's why.
Use the net worth method to determine if you're rich
If you want to find out if you are rich, the best way to do it is to calculate your net worth. Your net worth equals the amount of money that you are worth. It can be calculated by doing the following:
Adding up the value of your assets: Assets are items you own that have value and include anything you can sell and turn into cash, such as your:
- House
- Cars
- Bank accounts
- Stocks and other investments
- Treasury bills
Subtracting the value of your liabilities: Liabilities are obligations and include any debt, such as outstanding balances on your:
- Mortgage
- Personal loans
- Car loans
- Credit cards
To figure out if you are rich, looking at your net worth is better than simply looking at your income or your assets.
Say you earn $1 million a year. That may make it seem like you're rich at first glance -- but if you've taken on a lot of financial obligations and your annual required payments add up to $2 million, you aren't rich. You're actually very poor despite how much money you have because you can't afford to fulfill your financial obligations and you're a million in the hole.
Now, say you live in a huge mansion and drive an expensive car and wear tons of expensive jewelry. You might look rich. But if you've borrowed to the max to buy these things, then you're actually not wealthy at all -- you're just pretending to be. And in the process, you're missing out on creating any financial security for yourself and potentially making yourself less rich over time.
By looking at your assets minus your liabilities, you see how much wealth you're acquiring. And once you've acquired enough wealth, you're officially rich.
How high does your net worth have to be in order to be rich?
Schwab conducted a Modern Wealth survey in 2021 and found that Americans believe you need an average personal net worth of $1.9 million in order to be considered wealthy. This would mean that the value of the property you owned, minus everything you owe, would need to add up to almost $2 million.
But you may have a different definition of rich. Some people may consider themselves wealthy if they have a $1 million net worth while others wouldn't say they're rich until they have $5 million. A lot depends on your expectations. For example, the amount most people said they'd need for financial happiness was much lower, at $1.1 million -- and you may decide that achieving financial happiness is enough to make you rich.
The bottom line is, once you have a positive net worth (as opposed to owing more money than the value of everything you own), it's really a personal choice of just how high that net worth has to be in order to feel wealthy. By tracking your net worth, you can easily see if you've hit that target.
