Oct 24, 2008

Who do you Consider Rich?

When you were a child, who did you think was rich? Was it those movie or pop stars who had earned millions and had their own private planes? Was it those people who'd inherited their wealth, owned a mansion and had their own swimming pools? Or was it those people who could afford to go abroad for their holidays every year?

For me, it was all of the above. I used to look at a lot of people and figure that they were rich. And for some reason, I wanted to be rich too. At that stage of my life, it all equated to material wealth, personal possessions and the ability to spend money on whatever I pleased.

Nowadays though, my view of people who are rich is not exclusively based on money. I view people as rich if they are financially independent, keeping as busy as they like (maybe even working for themselves of course) and are happy in their lives. I also rate very highly those people who can spend time doing the things they love, whether it's volunteer work, a hobby or two, being with their families or even making a little money doing something of their own choosing.

The funny thing is most of the people I now consider rich, defined by the categories above, are either semi-retired or fully retired.

Who are these People?

Little yellow beauty
Photo: thinkscape

It is mainly understood, but mistaken, that the people who retire early are wealthy. However, there are a number of factors which goes against this viewpoint. For a start, to be retired doesn't mean you have to have a whole heap of money in your account. Nor does it mean you have earned millions and millions over a long and prosperous career.

All it means is that you can live on the amount of money you passively earn.

Or put it another way, you have reached that crossover point whereby your expenses are lower than your passive income. This means that, without lifting a finger and being careful with your expenditure, you no longer have to work.

Of course if you are only semi-retired and you still work a little, that income also adds up to offset your expenses so you can probably reach this point earlier than complete retirement. Yes, you might have quit working for someone else but at least you get to work on your own terms.

Getting There Faster

When you look at what I said earlier - live on the amount of money you passively earn - you can see that it is an easy equation.

Passive Income > Expenses

Whilst it is fairly simple to understand it is a lot harder to put into practice. Writing this blog, for example, helps me to put more things into place so that it becomes easier and easier and hopefully, I can reach that crossover point sooner rather than later.

As you can see, you can attain this point by increasing your passive income. But you can also attain this point earlier if you reduce your expenses. You'll start to realise that this is also exactly what you should be doing now and not just in retirement. You life should be organised so that your lifestyle in retirement is similar to your lifestyle now. There's no point scrimping and saving now to then splurge in retirement.

Similarly, there's no point spending like crazy now hoping that you'll be more frugal in your retirement.

By actively setting out your stand, how much you earn, how much you spend, you'll also be setting up what you need to get past that crossover point and into retirement. In fact, you might even be able to plan it years in advance, like me!

Everyday People

You mightn't have realised, that many people who are already retired, look exactly the same as you. They never had a hit record, they didn't inherit large amounts of money nor did they win the lottery. Instead, they seem to go for the bargains, don't buy designer clothes and clip coupons when they can.

They don't buy new cars, they don't need a huge house nor do they try and keep up with the Jones. In fact, they look just like regular people next door. You might even think that they don't have a whole lot of money at all, after all, their car isn't as big nor shiny as all the others in the local driveways.

But the truth of the matter is that they are richer than many of the people living in the same street. Probably richer in monetary value yes, but even more importantly, they are also richer in time too.

The reason?

Because they are retired.

They have been through the cost-cutting exercises, paid off their debts, own their houses outright, saved up an emergency fund, invested in the stock market or property and increased their income. Because they've done all of this previously, they now have the time to do whatever it is they please.

It is these people I now consider rich. They have the time to enjoy a great many things in life. After all, time is the one thing we can't earn more of.

Let me know who you consider to be rich?

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