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The definition of wealth depends on who you ask. Some people say wealth is purely monetary, it’s what money can buy. Others believe it goes well beyond cash in the bank, and has mostly to do with feelings of freedom and flexibility.
The bottom line? There’s no one correct definition of wealth, and you need to decide what it means for you. And according to financial advisors, how people define wealth often changes throughout their lives. Knowing how you define wealth today can help you accomplish two important tasks: setting financial goals and creating a strategy to accomplish them.
What Is Wealth? The Basics
The dictionary defines wealth as “the abundance of valuable material possessions or resources.” If that were all wealth is, then we would be done here. However, the definition gets a bit more nuanced.
You can break wealth down into two categories: tangible and intangible assets. These two categories work together to help you create your unique definition of wealth.
Tangible Assets That Define Wealth
Tangible assets are things that you can touch or see, like money in a 401(k), home or car. When you use tangible assets to define your wealth, you’ll typically want to calculate your net worth—the value of what you own less your debts.
Calculating your net worth is as simple as making a list of assets with a monetary value—bank, investment and retirement accounts plus things like real estate, vehicles and collectibles—and deducting your liabilities. Liabilities can include student loans, credit cards and personal loans. Your final number is your net worth or your current financial wealth.
Intangible Assets That Define Wealth
How can something “intangible” be defined as wealth? The answer might surprise you.
“Wealth is when someone has financial freedom during all economic cycles,” says Michael Berkhahn, a certified financial planner with Graham Capital Wealth Management. “It’s so much more than a sum of money.”
Consider this: You’ve saved a substantial sum of cash over the years and have three homes and two cars in the “assets” column. But you also have three mortgages and two car loans. You’d like to help your kids pay for their college educations and take a trip to Europe later this year—if only you didn’t have all this debt demanding your cash.
In this case, you don’t have the financial freedom to do what matters most to you—fulfilling your wanderlust and saving your kids from the burden of student loan debt.
Being wealthy is “more about not having stress” and less about “the stuff,” says Berkhahn. “It’s about having enough to do what makes you happy—retiring, opening your own business—while living within your means.”
Figuring Out How You Define “Wealthy”
Luckily, there’s no one set definition of “wealthy” that fits everyone. This is a term you get to define for yourself. So, how do you even start to create your definition of wealth?
“For most people, it’s a combination of financial security and being comfortable with where you are in life,” says Ross Hamilton, a chartered financial analyst, CFP and vice president of wealth management at Raymond James & Associates. “The financial piece affords people the ability to focus on softer topics.”
To help you get started with your definition of wealth, here are some steps you can take to figure out where you are and where you want to go:
- Write down your values. “You have to do some soul searching on what makes you happy,” says Berkhahn. Knowing what you value today—whether it’s building a legacy for those you love or simply having a home you own outright—can help you plan for the future. If you need help determining your priorities, you can always meet with a financial advisor who can ask questions to help you clarify what’s important.
- Create your number. Based on your values and the things you’d like to accomplish, calculate a number that will bring you the financial security and independence you want. This number will likely change throughout your lifetime, especially as you become more clear on your goals. Having a number to start with is your first step.
- Ask what you’re willing to do to get there. Once you have your number, think about your timeline. How far off are your goals? Can you afford to take on a higher level of risk? Hamilton says it’s important to consider the tradeoffs, such as higher risk for potentially higher returns. Ultimately, you must be comfortable with “how” to reach your “how much.”
- Make a plan. Whether you build a savings plan yourself or work with an advisor, you need a roadmap to guide your wealth-building journey. And just like your summer vacation might take a few detours as you discover you want to try ziplining or surfing, your financial plan can adapt as your priorities and definition of wealth change. You can’t choose the most efficient road to reach your new goals without a roadmap.
When Your Definition of “Wealthy” Changes
So, what should you do if you change how you define “wealth”? Here’s the good news: According to financial advisors, many people do, so you’ll be in good company.
“When you’re in your 20s or 30s, wealth is usually defined by someone’s net worth,” says Berkhahn. “But defining it that way forever can be kind of a neverending dream.”
In other words, it’s common for people to say, “I need X amount of money to be wealthy,” but if money’s all you define wealth by, you’ll probably find that it’s impossible ever to have “enough” to be happy. And it’s the happiness part that Hoffman has found the most interesting during his 13 years as a financial advisor.
“It’s a fascinating process to watch people go through,” Hamilton says, speaking to how his clients’ definition of wealth shifts from a dollar amount to a measure of happiness. Early in life, you may not yet be married, have a family or have discovered a cause that’s important to you. But Hamilton says that when kids and eventually grandkids become someone’s focus, he sees people start thinking about how their money and relationships intersect.
When dreams become headaches
“I think materialistic dreams are the goals that I typically see change later on or not the thing that provides people’s happiness,” says Hamilton. The number one regret his clients tend to have? Second homes.
“They’re overestimating its use or the costs of maintaining it,” he says. Another drawback Hamilton sees his clients wrestle with is feeling committed to an asset that cost a decent sum. “If you paid into a house on the eastern shore, you’re kinda committed to going there year in and year out,” he says. That obligation can eat away at the freedom many associate with wealth.
As money and relationships intersect, it becomes easier to adjust your financial plan. In the case of the second home that feels like an obligation, consider if it truly fits your current definition of wealth. If you see it as an asset, ask your kids whether they want to inherit it. If so, fantastic. That home now becomes part of how you provide for your family. If they don’t want to inherit it and you find it a burden, sell it and use the proceeds to achieve other priorities.
What Wealth Means to You
The truth is that you get to define what “wealth” means to you. And that definition can change throughout your lifetime. But it helps to think of wealth as a combination of financial resources and what brings you happiness—today and tomorrow.
“I think that the truly wealthy, as I’ve seen it, have focused on what’s enough to be content,” says Hamilton. And in his experience, that level of “enough” means less stress and more happiness.
