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Do You Really Need $2.4 Million to Be Wealthy?

By Wendy Connick – Jul 15, 2017 at 7:06AM

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Apparently a million dollars isn't what it used to be. Today, most Americans think it takes more than twice that to be wealthy.

How much money would you have to have tucked away before you considered yourself wealthy? According to the most recent Charles Schwab Modern Wealth Index survey, Americans believe that they need at least $2.4 million to be considered wealthy and at least $1.1 million to be considered "financially comfortable." That's a far higher net worth than most Americans enjoy.

Defining wealth

When survey respondents were asked to say what wealth meant to them, the most common answer was that wealth meant "having lots of money." However, that definition doesn't take into account how much money you really need. If you spend $5,000 a month on average and you bring in $10,000 a month in income, you've got a pile of extra money coming in that you can use for whatever purpose you desire. That would probably make you feel quite happy about your financial situation. On the other hand, someone making $10,000 a month who had expenses of $15,000 a month would likely be pretty miserable about his financial situation. So wealth might be better defined as having more than enough money to pay for everything you want and need.

Gold bars

Image source: Getty images.

Wealth doesn't mean high income

Celebrities and sports stars earning enormous salaries still manage to bury themselves in debt and even end up bankrupt on a regular basis. On the other hand, stories pop up in the news occasionally about secretaries and janitors who die and leave their heirs millions of dollars because they carefully saved a large percentage of their tiny salaries. Clearly income by itself doesn't determine whether or not you're wealthy; rather, it's your income compared to your expenses that will determine whether you amass a high net worth or end up broke.

Building your net worth

Whether you buy into the $2.4 million that the average American seems to require or you have your own figure in mind, getting your net worth high enough to qualify as "wealthy" can be quite a challenge. It requires you to balance your personal budget so that your income exceeds your expenses enough to save money on a regular basis. If you manage that feat, your next task is to put your savings to work so that your money will make significantly more money for you. Keeping all your extra money in a bank savings account almost certainly won't earn you enough of a return to make you wealthy, but if you invest the money wisely, the returns you'll get will considerably accelerate the process of building a high net worth.

Balance your budget

To get your income higher than your expenses, you have two options: increase your income or decrease your expenses. For the fastest possible results, try to do both.

Increasing your income might mean convincing your boss to give your raise, taking on an extra part-time job, turning a hobby into a moneymaking pursuit, selling unneeded items in garage sales or on eBay, and so on.

Reducing your expenses includes options such as paying down your debt to get rid of interest charges, cutting out unnecessary expenditures like that gym membership you never use, replacing expenses with cheaper alternatives, managing your money to reduce your tax bills, and so on. If you can get to the point where you're saving at least 15% of your income, you're doing a great job of balancing your budget. But by all means, set your goal even higher -- if you manage to save 25% or 30% of your income, you can hit a high net worth with amazing speed.

Investing for maximum returns

If you're starting from zero as far as savings go, the number one priority should be to set up an emergency savings account and fund it with at least enough to cover several months' worth of expenses. Such an account will keep you from plunging into debt should you suffer a temporary loss of income or an expensive emergency.

Once your emergency savings account is full enough, the next priority is to dump at least 15% of your income into retirement savings accounts. Accounts such as 401(k)s and IRAs allow your money to grow tax-free, so your returns will be higher than they would if you put all your money into a standard brokerage account.

If you've managed to save more than 15% of your income, you can put the excess into those retirement savings accounts or channel it into another investment vehicle. The advantage of having non-retirement investments is that you can tap into those investments at need without having to pay a 10% early withdrawal penalty to the IRS.

Getting to wealthy

A savings calculator can help you figure out how much you'll need to save to get to your predetermined "wealthy" net worth within your desired timeframe. If that number seems high to you, you can try chipping away further at your expenses to shift more money into savings. Or, you can decide to settle for a merely "financially comfortable" figure. After all, the most important financial goal is to have enough money to be happy -- and a financially comfortable net worth might provide all the happiness you need.

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