The amount of money at which someone will be rich just differs person to person. People have different principles and values.
Rich is a Mindset – What Does it Mean?
If you look at your current income or net worth, the chances are that you are already rich – probably richer than most people.
In your neighborhood alone, I am quite sure there will be thousands who have much less than you.
But in the same manner, there will also be millions in the world who have a lot more and better than you.
Should that matter to you? No.
One of the best strategies for achieving a sense of gratitude and mental peace is avoiding comparisons.
When we compare, we don’t look at what we have. Instead we focus on what we don’t have, and amplify it.
It’s a human psychology.
So, whether you’re rich or not is just a mindset. Though it seems more is always good to make you rich.
But do not forget the pursuit of money and wealth always costs so many things. Your time being one of them.
I am not against you for wanting to earn more, save more, invest more, and grow your wealth.
Yet it will be fool of you pursuing for more without realizing if you have enough, or worst without your own perspective of being rich.
Only you can tell if you are rich; how much you need to call yourself rich. It’s unlikely you can beat Elon Musk or Jeff Bezos.
Let us see if you’re already rich through some of the theories of my high school basic economics and few personal finance books.
Law of Diminishing Marginal Utility
This law states that the satisfaction we get from the consumption of an additional unit decreases as consumption increases.
Let us say I am hungry and am eating a plate of momo. The satisfaction from eating momo will decrease with every additional piece I eat.
Soon there will come a time when I won’t like to eat another piece. It’s at point A and the total quantity OB.
If I have money left after having a OB quantity of momo, that money will be useless. I don’t want momo and the satisfaction decreases – I might as well vomit when it goes below zero.
This means the diminishing marginal utility applies to income and wealth creation as well. You must determine the maximum utility point.
The marginal utility of income also increases initially and then decreases. When the income is 0X, satisfaction is AX. This is a survival phase.
When income is increased to OY, satisfaction is BY – comfort zone. It’s a luxury zone thereafter. Increase in income won’t bring additional utility.
Therefore, same money will be valued differently depending on in which zone the person is. $10,000 will be a lottery for me but nothing for Jeff Bezos.
If you have proper perspective, actually you don’t need so much money to be rich. You just need OY amount of wealth for the maximum satisfaction.
Hedonic Adaptation or Treadmill
Hedonic treadmill is an observed tendency of humans in quickly returning to a relatively stable level of happiness despite changes in life which can be either positive or negative.
This tendency explains as to why humans just seek instant gratifications, pleasures and then tend to have unlimited desires.
Hedonic treadmill is also the reason why humans have very high level of adaptability compared to other animals.
It’s a blessing as well as a curse. Blessing – we can endure the impacts of negative things. Curse – the happiness of positive things doesn’t last long.
My brother-in-law can be a good example for this. Let me explain it in a graphical representation:
He wanted to buy a Maruti Celerio after he joined his service. You can see his level of happiness when he could buy the car.
But the happiness of getting and owning the Celerio gradually decreased as he saw another better car, Hyundai i20 Active.
In a year or so, he sold off the Maruti Celerio and purchased the Hyuandai i20 Active.
This cycle continues and the tendency of getting fed up of what you have and desire for new things will never end. Just like that, he recently again sold off his i20 Active and purchased a KIA Seltos.
So my brother-in-law is merely running a never ending tread mill lured by his pleasures and desires.
Unless he sets a limit to his desire or considers what he has as enough, money will never be enough for him.
He’ll be working for money until he die. Nothing is free. Building wealth also comes at a price.
The Cost of Building Your Wealth
Nothing is free in the world. Everything has a cost, even money you earn. If your salary is Nu.30,000 the price of that money is your time (30 days) and energy.
When we purchase things in market say iPhone, they’ll have price given in money. In this case let us keep Nu.70,000.
The truth is we can express that Nu.70,000 in hours as well.
When your salary is Nu.30,000, your hourly rate is Nu.187.50 assuming you work for 8 hours a day and four weeks a month.
This means that iPhone’s price is 373 hours for you. If you purchase it, in principle you’ll work 2 months plus just for the iPhone.
Similarly, if you pay Nu.30,000 in a year as an income tax you’re basically contributing free labor of one month for the government.
In the book Your Money or Your Life, money is something we get in an exchange for our life energy.
People who pursue financial freedom or FIRE aim to exchange less of life energy with more or same amount of money.
It’s to earn money even if you are not working for it. Your passive income from investing is one of such income.
More is not always better. Undisciplined pursuit of more and more wealth will increase the cost beyond a sensible level.
But the cost sensibility will differ person to person. It can be determined only by yourself.
It might cost just about 10% of his total wealth for Warren Buffett to own a jet. But 10% of your wealth might afford only a plate of momo at Zombala Restaurant.
Similarly, how much Ap Buffett need you may not need. Because the cost sensibilities are different for you and Buffett.
Point of Financial Independence
The term financial independence is interpreted in various ways. But one common explanation is the status of not having to work for money.
You are financially independent when your passive income can meet all your expenses.
However, in the book Your Money or Your Life the authors call this as a crossover point.
The crossover point is the point in time when your income from various investments (passive income) surpasses your expenses.
In above illustration, the person needs OB amount of investment returns to reach his crossover point. This means after OA years, he is financially independent – his investment income surpasses expense.
Initially, you’ve to live below your means and invest the difference. When investment keeps increasing supercharged by the compound interest, its returns will overtake your expense.
FI/RE community aims to reach the crossover point sooner i.e without necessarily taking OA years like in the illustration.
Some people don’t wait for the crossover point. They instead use the 4% safe withdrawal rule by investing 25X of their annual expenses at once and then living thereof on its returns.
Rich is a Mindset – Personal View
Once Bob Marley was asked if he has a lot of possessions like money in the bank and considers himself rich. He replied:
Possessions make you rich? I don’t have that type of riches. My riches is life, forever.
We can claim Dr. Abdul Kalam, Mahatma Gandhi, and Mother Teresa are few such people. But they aren’t majority.
Common people like you and me can’t remain like that. Who would think a poor or a bankrupt person is as rich as a billionaire?
If that is the case, we don’t have to fight poverty.
One popular study on income and happiness revealed that an individual’s happiness increases continuously until the income reaches $75,000.
It means we cannot prove that a person earning $100,000 is happier than one who earns $75,000.
We should ask if we have an income that meets our basic needs, forget about $75,000.
Therefore, I feel that ‘rich is a mindset‘ is a moderation one can use after meeting basic needs.
Governments make us pay for almost all basic needs like water and light. So it isn’t for people who don’t have anything.
I have been in poverty. Now I am not so poor – my income is above basic expense. This principle can be for me now.
It’ll be useless to pursue for more hereafter if the price is high. Because who would pursue for something that cost more than its value?
Therefore, you must determine your own ENOUGH point. Otherwise you’ll be hoarding money as if there is no death and then finally die without having actually lived.
Is being rich a mindset for you? Do you have a different perspective of being rich? Please share in the comment.
