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What Does it Mean to be ‘Wealthy’?

by Jason Dean 


moneymattersThe Forbes 400 list of the four hundred richest Americans was just released, and for the first time ever, being a billionaire wasn’t good enough to make the list. It’s great that there are more than four hundred billionaires in America (actually, four hundred people with net assets of $1.3 billion or greater!), but the sad thing is that most Americans can’t even conceptualize how much a billion dollars is.

Most people have the dream of acquiring a million dollars in assets. This is a good goal! After all, with $1 million in liquid assets, you could put all of your cash into thirty-year U.S. Treasury bonds, which typically yield around 4.75%. In this case, you would earn $47,500 a year in interest for the next thirty years, and then at the end of that period, you’d get your full million back! A lot of people might say they couldn’t live on $47.5k a year, but if you were fully retired, your expenses would be lower. What’s more, you could invest some of that $47.5k each year into further growing your wealth.

But what about inflation? True enough, the value of your yearly $47,500 would lose purchase power over time, and by the time you got your million back in thirty years, it might be worth (purchase-power-wise) more like $100k. That’s why there is another great government investment product, TIPS — Treasury Inflation-Protected Securities. These yield a lot less than regular T-bonds, (more in the 1-2% range) but the biannual payments and final payback are adjusted each year according to the Consumer Price Index of inflation. So if inflation stayed at 3%, then a $1 million worth of thirty-year TIPS would be worth $2.9 million at maturity, and your twice-yearly payments would also go up as inflation went up.

The best thing about Treasury bonds and TIPS is that they are guaranteed by the government — no one but the government, since it controls the printing presses and the guns that can force people to pay taxes, can guarantee investments. In addition, it is illegal for state governments to tax you on the interest earned on federal-government bonds (although Uncle Sam still takes his share).

On second thought, $2 million might be a lot better. At this level of wealth, TIPS could provide an inflation-protected income of around $50,000, with the redeemable value of your security the inflation-adjusted value of $2 million. In other words, TIPS allow you to collect income from your money without ever having to worry about inflation, and never dipping into principal!

What happens if you can’t wait thirty years to cash in your investments? Well, Treasury bonds and TIPS both trade on the open market, so you can buy them or sell them at any time, no problem. You shouldn’t think of government bonds like the savings bonds your grandma gave you each birthday, or like a CD. They’re more like stocks, really.

Okay, so what about the Forbes list? Well, you already see what you could do with $1 million or two. Now imagine if you had Sergey Brin’s money. Who is Sergey Brin? He’s one of the two co-founders of Google, the other being Larry Page. Each of these young men, both age 34, have $18.5 billion in assets. That’s billion with a “b.” If they put their money in Treasury bonds, they would receive around $878 million a year in interest — think you could live on that? When it came to TIPS, they could be earning several hundred millions of dollars each year, in interest, without ever risking loss of principal due to inflation. That’s amazing, isn’t it?

Well then consider Bill Gates. He has $59 billion — over three times what either Google founder has. His interest income would be close to $2 billion a year — in interest — if he wanted it that way.

When you consider the enormous wealth of the Forbes 400, it makes getting that first million or two seem a cinch. It’s really rather inspiring, if you ask me.

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Comments

5 Responses to “What Does it Mean to be ‘Wealthy’?”

  1. Minimum Wage on September 22nd, 2007 7:48 pm

    I live on minimum wage. I have no synmpathy for anyone who cannot live on $47.5K a year.

  2. Jason Dean on September 22nd, 2007 8:33 pm

    I hear you. I make in the neighborhood of $47.5k myself, but I have lived on a LOT less — i.e. in the 20′s. It’s amazing how people can waste money. Although, I myself could not imagine living on minimum wage. Even at $7.50, that’s less than $16k, pre-tax.

    Thanks for posting.

  3. The Sunday Review #39 on September 23rd, 2007 9:01 am

    [...] What Does it Mean to be ‘Wealthy’? by Jason @ Smart Money Daily. [...]

  4. Carnival of Personal Finance #119 - Blunt Money on September 24th, 2007 7:05 am

    [...] Money Daily presents What Does it Mean to be ‘Wealthy’?. The Forbes 400 list was just released, and for the first time ever, having a billion dollars was [...]

  5. ralph on December 3rd, 2008 1:50 pm

    wat does it mean to be wealthy?
    well watit means is that u can buy watever u desire, and make enough money to support urself and family

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