The Last Bear

The first post will be published on January 1st 2010

The first post will be published on January 1st 2010

The first post will be published on January 1st 2010.

The definition of wealth has been often attempted and there have been quite a few different definitions of wealth over time. Do not confuse being wealthy with being rich as there is a big difference between those two. You can be wealthy but not financially rich, and you can be financially rich but not wealthy. In this example, wealth will be viewed as financial wealth or financial independence. When it comes to overall wealth, there are more factors which need to be combined, most of them have nothing to do with money and are not able to be purchased. It always depends on what variables are taken into consideration when wealth is defined and while there are plenty of different ways to define wealth, when it comes down to it here is one definition which clearly defines wealth:

Wealth is the amount of days you can maintain your lifestyle from passive income if you stop to accumulate additional cash assets. In other words, the amount of days an individual is able to maintain the desired lifestyle from passive cash flow.

Now let us add some numbers to the definition as well as two examples. The first example will illustrate an individual which is wealthy, but not rich. The second example will showcase an individual which is rich, but not wealthy. Both examples will use the 'Cash is King' rule and will be oversimplified to enhance comprehension. My amazing girlfriend Ash read that DNA is meant to last 120 years (do not confuse this with the time DNA can be recovered which is much longer) but due to bad health as well as lifestyle  choices that time is not reached and explains why the average person lives to about 80 years of age, give or take a few (the debate about DNA is very controversial and as a society we just wet our feet on that topic but here is a little piece of literature which supports what Ash read). Just to be on the safe side of the wealth definition we will use 120 years as the average age.

Example 1: A wealthy person, 30 years of age but not rich

Assume that our 30 year old individual lives the lifestyle desired. Monthly cash expenses, or the money required to maintain that lifestyle, are $3,000 per month or $36,000 per year. In order to further simplify this example let us take the lousy excuse of an investment return achieved by the worst professional investors in todays investment arena, mutual funds. Mutual funds are able to deliver constant portfolio mismanagement and for the sake of this example let us assume that they will be able to constantly deliver a pathetic joke of 6% per year.

The individual will reach wealth status once $600,000 in cash have been accumulated (6% of $600,000 equals $36,000). Keep in mind that this example is an extreme. An individual who accumulates $600,000 in cash and only manages $36,000 in cash flow per year must be a mutual fund investor. Take this one step further and apply the cash is king rule, without passive cash flow the individual requires a total of $3,240,000 in cash (90 years x $36,000) in order to be wealthy without any degree of risk.

$3,000 in monthly cash flow is possible with a $6,000 cash portfolio and an elevated amount of sophistication, but that is another story.


Example 2: A rich person, 30 years of age but not wealthy

Assume that our 30 year old individual lives the lifestyle desired. Monthly cash expenses, or the money required to maintain that lifestyle, are $250,000 per month or $3,000,000 per year. Since this is supposed to be a rich person let us assume that the individual achieves a return of 15% per year instead of the 6% (both returns are laughable at best). Assume that the individual has accumulated $15,000,000 in cash assets and that it will meet your definition of rich. This individual does not meet the definition of wealthy as cash assets will run out within 12-15 years due to the $750,000 shortfall each year (15% of $15,000,000 equals $2,250,000 while the annual cash requirement is $3,000,000). As a matter of fact, each year the monthly cash flow will decrease as less capital will be available.

According to the cash is king definition wealth status will not be reached until $270,000,000 in cash are accumulated (90 years x $3,000,000).

Keep an open mind to the above examples and you may learn a very valuable lesson or remain ignorant and keep doing what you are doing while a few will progress. The majority is not even able to reach financial independence with very modest expenses and is 100% dependent on a third party for employment in order to continue the rat race. The fact that the majority is unaware of an alternate way is no valid argument but rather an excuse. Mental as well as fiscal laziness is equal to physical laziness which is why laziness decreases health as well as wealth.

Which one would you rather be, a wealthy individual which is not rich or a rich individual which is not wealthy?

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