When it comes to measuring financial progress, many of us figure that if we could just have more money, then we’d be rich. But does making more money make you rich?
What is Rich?
One of the biggest debates going on right now in the world of personal finance (thanks in large part to talk about taxes and the “wealthy”) is what constitutes rich. To a certain extent, we can probably agree that where you live makes a big difference in whether or not you feel rich. After all, the cost of living someplace like San Francisco (as Vered does) is much higher than living in Utah (like I do). Vered and I might make the same — I have no idea if we really do — but because San Francisco costs a lot more than Utah, I might have more disposable income.
Even if Vered makes more than I do, there’s still a chance that I might have more disposable income, just because my expenses are smaller due to where I live. In our theoretical example, she may make more money than I do, and be “wealthier” in terms of income, but when it comes to how much is left over at the end of the month, I could be “richer.” Making more money may not translate into having that money to spend on what we want, or having more money to put aside for the future or retirement.
Expenses that Drain Away Wealth
On top of that, it is worth noting that how much money you have is about more than your income and where you live. There are other things that drain a wealth. Some of these include:
- Debt: This is a big one. If you have debt obligations, you are paying interest to someone else, rather than using that money to build a nest egg or spending it how you want. I have known people who make more than $150,000 a year, but are so saddled with debt that they feel themselves quite poor, unable to make ends meet.
- Your house and/or car: Many people I know are house poor. They decided to get a big house, and now struggle to make ends meet. We have a more modest home, and since we didn’t get what we “qualified” for, our housing costs are only about 1/5 of our monthly income. That’s less than the “suggested” 1/3, and certainly less than many people who bought homes before the financial crash and have monthly housing costs of almost 1/2 their income. The same goes for getting an expensive car, whose payments and insurance can suck up large portions of monthly income.
- Kids: Sure, kids can bring a great deal of joy into life, but they can also be expensive. My husband’s parents had three kids, and they were able to put more aside than my own parents, who had five kids. Children can cost money, and your salary might not go as far if you have kids.
- Pets: While pets can be fun to have around, they, too, can get expensive.
As you might imagine, there is nothing wrong with spending your money on things that are important to you. However, in some cases you might be spending enough that even an income that would seem to make you “rich” only barely covers your obligations. In my mind, “rich” is being able to buy what you need now, save for the future, and spend a little on things that you like. Having a higher income won’t make you rich if you don’t know how to manage your money.
What do you think? Does just having more money make you rich?