Saturday, February 23, 2008

What does it mean to be wealthy (2)?

In the first post on this subject, I defined financial wealth as being a measure of a person's ability to sustain their lifestyle. This begs the obvious question about what lifestyle is being sustained.

Although somewhat arbitrary, if lifestyle is measured by consumption, then the following would be an indication of differing levels of relative wealth or poverty:

1. poor: can only afford the basic necessities of food, clothing and shelter;

2. lower middle class: can afford some discretionary expenditure, such as better food, consumer electronics, a cheap car and the like;

3. upper middle class: have or can afford some assets of lasting value, such as purchasing your own home as well as better consumer goods and services such as a new car and overseas holidays;

4. mass affluent: have or can afford assets above those needed to enjoy a middle class lifestyle such as a holiday home, a luxury car and private education for children;

5. wealthy: have or can afford substantial assets well beyond what is needed to sustain your chosen lifestyle.

This approach effectively defines financial wealth as a two dimensional matrix. At one level being wealthy is a function of ability to meet a chosen level of expenditure and to accumulate assets of lasting value (or not as the case may be). From a different perspective, wealth is defined in absolute terms by reference to what level of consumption a person is able to afford (which may be different from what a person actually chooses to spend).

The alternatives to defining what it means to be wealthy are either absolute measures such as those used by Merrill Lynch Cap Gemini for the purposes of their annual world wealth report or formula driven approaches such as the Thomas Stanley/William Danko PAW/UAW formula from The Millionaire Next Door. Each of these has its uses and cannot be dismissed as being wrong but without the missing limb of ability to choose a given lifestyle and to sustain that lifestyle they appear to be incomplete.

No comments: