The word “rich” means different things to different people. One definition is being debt-free and having enough money to do the things you want. Another is that it’s a form of financial freedom — being able to escape the daily grind and follow your dreams. Others put a dollar amount on it.
What’s for sure is that being rich has more to do with the value of the investments in your brokerage account than the type of car you drive. And you don’t have to win the lottery or inherit money to get rich — it’s within reach for many of us. Indeed, many of today’s millionaires got rich by consistently investing part of their salary.
How to measure wealth
One concrete way to measure wealth is your net worth. This is the difference between your assets and your liabilities. You calculate it by adding up the total value of assets, like your home and investments, then subtract everything you owe in loans, mortgages, and credit cards. It can offer a useful snapshot of your financial situation, particularly if you track it over time.
You can boost your net worth by maxing out your annual contributions to tax-advantaged accounts such as IRAs. Some brokerages, like Robinhood, will even give you a 1% match on the money you put in. Click here to learn more about this brokerage.
Americans believe $2.5 million would make them wealthy
A recent Charles Schwab Modern Wealth Survey found that Americans think you need a net worth of $2.5 million to be wealthy and $778,000 to be financially comfortable.
As you’ll see below, the respondents’ idea of wealth varied dramatically by generation.
| Generation | Average Net Worth to Be Wealthy |
|---|---|
| All Americans | $2.5 million |
| Boomers | $2.8 million |
| Gen X | $2.7 million |
| Millennials | $2.2 million |
| Gen Z | $1.2 million |
Data source: Charles Schwab
On top of this, $1 million has a different value if you live in New York City than, say, rural Indiana. The Schwab survey showed that residents of San Francisco put the wealth threshold at a whopping $4.4 million. Dallas residents would consider themselves wealthy if they had $2.2 million.
These three steps will help you build wealth
A lot of aspects of getting rich come back to one deceptively simple idea: Spend less than you earn and invest the difference. The bigger the gap between your income and your expenses, the more you can use to build wealth. Of course, this is easier said than done.
1. Increase your income and/or reduce your spending
Income is important, but it doesn’t define your wealth. You might earn a lot of money, but you won’t build wealth if you don’t save or invest any of it. Similarly, you might earn less, live a frugal lifestyle, and still manage to put aside a decent chunk of cash every month.
Look through your recent expenses to find non-essential spending you might want to cut back on. If you can’t see any wiggle room, consider ways to increase your earnings. That might be a side hustle, extra hours at work, or even transitioning to a better-paying job.
The name of the game is finding money to invest and doing it consistently. Some financial advisors suggest saving 15% of your income. If that feels impossible, start with a smaller amount.
2. Use tax-advantaged investment accounts
Investing involves buying assets you believe will grow in value. That might include real estate, shares, bonds, ETFs, or commodities like gold.
There may be years when your portfolio loses value, but the idea is that your investments will grow over time. For example, the S&P 500, which contains the largest 500 publicly traded U.S. companies, has generated average annual returns of around 8% over the last 100 years.
If you want to build wealth for retirement, tax-advantaged accounts such as 401(k)s or individual retirement accounts (IRAs) can boost your portfolio. 401(k)s are work-based plans, and some come with the benefit of employer matching. IRAs are open to everybody. Depending on what type you use, you can either reduce your tax bill today or make tax-free withdrawals once you stop work.
3. Give it time
Time is a powerful force when it comes to building wealth. The longer you can leave your assets to compound, the more they will start to work for you. Time also evens out any bad years in the stock market.
To put it in real money, if you invested $500 a month and earned an average annual return of 8%, here’s how your portfolio might grow each decade:
| Length of Investment | Value of Portfolio |
|---|---|
| 10 years | $87,000 |
| 20 years | $275,000 |
| 30 years | $680,000 |
Data source: Author’s calculations
Bottom line
Many of us would love the financial freedom of being rich and not having to worry about bills. That might mean building a net worth of $2.5 million, but the figure depends on your lifestyle. What matters most is believing you can build wealth and taking steps in that direction.