The Nature of Wealth

Last week I was in Nashville, and the friends I was with took us on a tour of Belle Meade, which is the high rent district of Nashville. We passed mansion after mansion. Acres of perfectly groomed landscaping. Then we passed the Belle Meade Country Club. My friends insisted that only “old money” could belong. No parvenu with only a couple of hit country albums need apply.

This started me thinking on the subject of wealth (admittedly, a topic never too far from my thoughts).

How do define wealth? How would you know if you are wealthy? If you are not yet wealthy, but hope to be, how do you define the goal?

A lot of people would define it in terms of your possessions and entertainment. If you have the biggest house, the fanciest car, the most toys, you’re wealthy. Similarly, if you fly to Europe on vacation, or dine out at the most expensive restaurants, you’re wealthy.

I’m not sure I agree with that stance. Consider the real estate bubble, now collapsing. There were plenty of people, especially in the more overheated markets of California and Florida, who repeatedly refinanced their houses, cashing out the equity. They then spent the cash on the very things listed above. But now that the boom has come to a halt, those people are losing their lifestyle, along with the ability to refinance.

If your lifestyle has that little security, I would not consider that as true wealth.

Other people might define wealth in terms of the income that someone earns. “He’s a doctor, they’re all rich.” “CEO’s make the big bucks.”

I think the problem with that definition is that you have to stay on the treadmill to keep earning that money. It’s kind of like a shark: if you stop swimming, you sink to the bottom and die.

So for me, wealth is an issue of how much passive income you have. Passive income is money that comes to you without your having to work for it. The source of the money is something you own, or even who you are. Dividends. Profits from a business that someone else manages. Interest on bonds. Even capital gains from selling appreciated assets (after all, somebody had to make money in California real estate). All of those are examples of passive income.

Passive income can also come from pensions and social security. Even though you had to work to pay into the system, you aren’t working for the money now. As long as you can manage to stay warmer than room temperature, they are going to continue sending you checks.

So, by my definition, if you want to be wealthy, you need to develop sources of passive income.