What Does it Really Mean to Be Rich? | Top 10%, 5%, and 1% Net Worth and Income Explained

Summary

In this video, Aaron explores the concept of being 'rich' by examining various financial thresholds and definitions of wealth. He discusses net worth classifications like high net worth individuals (HNWI) and ultra-high net worth individuals (UHNWI), noting that the general American perception of wealth starts at around $2.2 million. The video also delves into income benchmarks, highlighting top earners and how income influences the ability to build wealth. Aaron concludes with a refreshing definition of being rich—having passive income that exceeds your expenses—and encourages viewers to invest early and consistently to achieve financial independence.

Takeaways

• 😀 The definition of being 'rich' is subjective and varies depending on whether you're considering income, net worth, or a combination of both.
• 😀 A high net worth individual is typically someone with $1 million or more in liquid investable assets, excluding their primary residence.
• 😀 Net worth thresholds for being considered 'rich' increase significantly: $5-10 million for a very high net worth and $30 million or more for ultra high net worth.
• 😀 The general American consensus for feeling 'wealthy' tends to fall around $2.2 million in net worth, which is above traditional high-net-worth thresholds.
• 😀 Reaching the first seven figures in investable assets can provide a comfortable middle-class lifestyle, especially with a safe withdrawal rate.
• 😀 Data from the Federal Reserve and the Economic Policy Institute show that to be in the top 1% of income earners, you need to earn between $500,000 and $820,000 annually.
• 😀 The income required to be in the top 1% is a significant leap compared to the top 10% and top 5%, showing exponential income growth as you climb the percentiles.
• 😀 Wealth and 'richness' are not solely dependent on income or net worth but are also affected by your lifestyle and spending habits.
• 😀 A better definition of being 'rich' is having passive income that exceeds your burn rate (expenses), meaning your income covers all your needs without needing to work for it.
• 😀 The key to building wealth and becoming 'rich' is to start investing early, stay consistent, and let compounding work in your favor.

Q & A

What is the general threshold for being considered a high net worth individual?

A high net worth individual is typically someone with a net worth of at least $1 million in investable assets, excluding their primary residence.

What defines a 'very high net worth' individual?

A 'very high net worth' individual is generally someone with a net worth between $5 million and $10 million.

What is the threshold for being considered an 'ultra high net worth' individual?

An 'ultra high net worth' individual is defined as someone with a net worth of $30 million or more.

What net worth figure do most Americans associate with being wealthy?

Many Americans consider a net worth of around $2.2 million to be the point at which they would feel wealthy.

What income is required to be in the top 1% of all income earners in the U.S.?

To be in the top 1% of income earners in the U.S., an individual needs an annual income of approximately $500,000, or about $42,000 per month.

How does the Economic Policy Research Institute define the income required to be in the top 1%?

The Economic Policy Research Institute defines the top 1% income threshold as about $820,000 annually, which is roughly $68,000 per month.

Why does Aaron not prefer using income or net worth percentiles as definitions for being rich?

Aaron believes that using income or net worth percentiles to define being rich overlooks various personal factors, such as family size, location, and individual lifestyle, which can significantly influence one's financial situation.

What is Scott Galloway's definition of being rich?

Scott Galloway defines being rich as having passive income that exceeds your burn rate, meaning your passive income is greater than your expenses.

What types of income sources could be considered 'passive income' according to the video?

Passive income could include earnings from investments, pensions, annuities, or income generated from assets like rental properties, though Aaron clarifies that being a landlord isn't a completely passive activity.

What is the key difference between someone who is 'rich' and someone who is not, based on passive income?

The key difference is whether or not passive income covers all of your expenses. If your passive income exceeds your expenses, you're considered rich, as you no longer need to rely on active income to support your lifestyle.