How can we quantify wealth in a meaningful way?
When people think about their financial situation, they often focus heavily on the numbers. But while an income of $100,000 a year might psychologically feel a lot better than $90,000, it’s really arbitrary and doesn’t make much difference in the here and now. What matters a lot more for your outlook on life is what the numbers actually do for your lifestyle.
I use the 6 levels of wealth to compartmentalize the many possible financial situations into 6 meaningful categories that we can work with.
Poor Level 1
At this level, you’re either homeless or a stone’s throw from being there. Your life basically can’t be made any worse by taking away money. Most people reading this have probably never experienced this situation.
Poor Level 2
You earn an income, keep a roof over your head, and pay the bills. You’re getting by, but not getting ahead. The money’s all gone at the end of the month, so you don’t seem to be gaining any ground. This is where people usually find themselves right out of school, and often for a very long time afterwards.
Poor Level 3
To others, you appear to be living the good life, and might be considered rich. However, you can only sustain the illusion by prostituting yourself (by which I mean having a job). Your lifestyle is completely dependent on your salary, and you live in fear of losing your job, knowing that the house of cards will come tumbling down.
Rich Level 1
Now we transition from financial dependence to financial independence. At this level, you may not have any fancy things, but you can maintain your lifestyle indefinitely without having a job. Your income from your business activities and your investments is enough to pay the bills, so you enjoy tremendous freedom from “the man.”
Rich Level 2
More than just getting by without a job, now you’re able to afford nice things as well. You might have a swanky house, exotic car, and so forth, or maybe you don’t need material things so you just save your money or give a lot to charity.
Rich Level 3
This is where professional athletes and Hollywood celebrities are, the level where you don’t even consider money to be a limited resource.
Of course, these levels are not set in stone, and someone else could come up with an entirely different system that also made sense. But I think it’s important to think about where you want to be with your financial situation, and not just in terms of dollar amounts, but in terms of what your life would be like. I’m shooting for no less than rich level 1, with an ultimate goal of rich level 2. What about you?