How Much Money Does It Take To Be Rich?

As a new investor, you probably know that you should spend less than you make and invest the rest in stocks, bonds, mutual funds,real estate or other assets. Over time, you know that the money should grow if it is wisely managed and, you hope, you will one day have enough upon which to retire. (For more information on howpeople get rich, read How to Get Rich - A Guide for New Investors.)

Have you ever wondered, though, "how much money does it take to be rich?" That is the question posed to a group of financial planners from a recent CNN Money publication that caught my eye. Most seemed to believe that it took between $2 million and $12 million to be rich. This would generate roughly $300,000 in annual income and would allow you to afford the following lifestyle all without a job:

• Pay all taxes
• Spend $3,800 per month on housing expenses
• Have $12,000 in cash left over each month to spend any way you like

I find it interesting that this correlates closely with the bottom-tier of the so-called capitalist class in the United States. It seems that most people really do just want to put on their Mr. Monopoly hat, setup an office to monitor their investments, and spend all day reading, going to nice restaurants, giving generously to charities, and adding to their net worth.

People Are Satisfied By Increases In Net Worth, Not Absolute Income

It is interesting that people are satisfied by watching their net worth increase each year notby making more money per se. That is, you are more likely to be satisfied if you make $300,000 per year, live well but add $100,000 to your stock portfolio each Christmas than you would be making $1,000,000 and spending every penny of it.

Something deep in most investor's psyche seems to be triggered when we pile up treasure at no expense to our lifestyle or giving. It turns out that once you have the granite counter tops, the nice car, and are dressed in bespoke Ede and Ravenscroft with matching bespoke George Cleverley shoes, wearing Creed Bois du Portugal as you study your portfolio in your newly built custom Clive Christian study, spending more money doesn't make you any happier.

It seems the psychologists have found that everyone just wants to get to that point; collecting municipal bond interest, cash dividends, and playing golf. Once you are there, you don't want to spend more money, you just want to watch the figures get larger like a game or scorecard.

The Secret to Successful Investing

I explained this concept to you in an article called The Secret Philosophy of Successful Investing. Your goal as a new investor should not be to merely pile up treasure endlessly at the expense of the products, services, and experiences you want for your life. Instead, it should be to find out what it is you want, how much monthly cash you need to afford it, and then we can work on calculating the total investments that would be required to service that lifestyle.

Some Have Argued It Requires Much Less Money to Be Rich

A recent study in the United Kingdom found that people were happiest with $75,000 (United States) household income without working, which requires only $1,500,000 in net worth earning 5% per year. Presuming this income came from tax-free bonds, that is $6,250 in monthly income without working. For most people, I would think that would be a great source of satisfaction because you could have a house, car, clothing, and pay cash for what you wanted if you were middle or working class, lived in a nice neighborhood, and were located in the Midwest or South where the cost of living is substantially lower than New York or Los Angeles.

The point of all of this is you must answer the question - "How much money does it take to be rich?" for yourself. There is no right or wrong answer and the difference is going to depend upon whether you are happy driving a Toyota or you want a Bentley, whether you are comfortable in J.C. Penney dress shirts with a Seiko watch or you prefer wearing a $250,000 Patek Phillipe Grand Complications watch with flawless diamonds. You are on the only one that can answer that question and there is no right or wrong answer.