Tag Archives: lifestyle

Wealth: Level 1 – Security

As discussed in the previous post, the first level of wealth is financial security. This really is a level that everyone should attain. It does not require such a big amount of money and it is truly essential to the prosperity of our global civilization as a whole.

Financial security implies that you are able to absorb unforeseen financial shocks such as a job loss, commodity price hikes and rising interest rates. The measure I use for financial security is called financial resilience: the number of years that your accumulated (financial) wealth can sustain your lifestyle (and that of any dependents) if your income were cut off today.

For basic financial security, your financial resilience should roughly follow the graph given below: a steady increase for the first 30 or so years of your career and then, once the kids leave home, a sharp increase to prepare for retirement (do not blindly rely on our insolvent Western governments to keep on paying out generous pensions).

Another very important point is that things like the value of your home and your cars do not count in the calculation of financial resilience. These things form part of your lifestyle and, if you’re forced to sell them, your lifestyle will be disrupted. No, the wealth we are talking about here is mostly financial assets (savings, stocks, bonds etc.), things that can be easily converted into cash without affecting your lifestyle.

It is important to note that you can improve your financial resilience in two ways: by increasing your financial assets (saving and investing more) and by decreasing your cost of living (consciously spending less). Notice that these two things are one and the same: if you spend less, you have more to save and invest. A person saving 10-20% of the average developed world income (unlike the American trend shown below) will be able to easily follow the above graph. Also, the sharp rise required in the last 10 years will be easy once the kids leave home. For example; halving your cost of living will instantly double your financial resilience.

When looking at the world as a whole, widespread financial resilience really is the one and only path to complete economic stability. Our modern economy is so unstable simply because the vast majority of people live from paycheck to paycheck, implying that a sudden reduction in income will force them to also change their consumption. If one person can buy less, he reduces the income of someone else, who then, in turn, can buy less, thereby reducing the income of someone else etc. These kinds of disruptive economic cascades are discussed in more detail in a page series starting here.

However, if everyone had a few years of financial resilience, we would all be able to absorb any unexpected financial shocks without changing our spending at all, thereby stopping any disruptive economic cascade before it can even begin. This, in short, will make the economy recession-proof. And yes, the Western world could really use some recession-proofing right now.

Burning it off

The average American consumes about 50% more calories than that which is needed for optimal health. This would not be such a big problem if these calories were burnt off through daily exercise, but, at 600 calories per hour of running, the average American would have to run for 90 minutes a day to maintain a healthy weight. And let’s face it, very few Americans exercise for 90 minutes per week (let alone 90 minutes per day). That’s why 3 out of every 4 Americans will be overweight by 2020…

Fact: America (and the rest of the developed world) can blow as much money as they want on diet and weight-loss fads, but they will keep getting fatter until they correct their energy balance. It really is that simple.

Wealth: What is it exactly?

Well, the dictionary definition of wealth is “an abundance of valuable material possessions” – something that sounds nice, but is not really all that useful. After all, how much is “an abundance”?

A more quantifiable definition of wealth is the total financial net worth of a person: the difference between assets and liabilities. For most people, this would be the dollar sum of the value of their home, their cars, their savings and their investments minus the sum of all their debt (home loan, car loan, credit cards etc.). A total net worth calculation returns a fixed dollar amount of, say, $100,000. But again we have to ask ourselves: what does this mean?

In order to answer this question once and for all, we first have to establish what exactly we want from our wealth. Once we have answered that question, we can better assess how much we actually need before we can consider ourselves to be wealthy.

OK, so why do we want to be wealthy? Well, as I see it, there are basically three reasons, three highly valuable things that we can gain from wealth: security, freedom and power.

The first two elements, security and freedom, can give us that which all of us should strive for: as many happy life years as possible for ourselves and our families. The third element, power, can give us something which is a bit more enigmatic and a lot harder to achieve: a lasting legacy.

It is very important to note that these three elements of wealth require very different quantities of money. Even though embarrassingly few people in today’s world can honestly call themselves financially secure, the dollar amount needed to achieve this outcome is actually quite modest. Everyone should strive to achieve at least this level of wealth. The two higher levels, freedom and power, require much greater sums, but are not strictly required for attaining a happy, healthy and wealthy life.

Over the next three posts, we will discuss each of these three elements in greater detail, focusing not only on what they imply for individuals, but also what their effects on society can be if many individuals commit to building financial security, freedom and power. A better understanding of these three elements will help you answer two very important questions:

How much do I personally need before I can consider myself to be wealthy?

Why do I want to reach this particular level of wealth?

The answer to the first question will give you a goal and the answer to the second will give you a reason for achieving it. If the first answer is realistic but challenging and the second answer is sufficiently compelling, you are virtually guaranteed to succeed.