Some words are abstractions of a tangible thing, while others are abstractions of a state that is itself an abstraction. Forcing precise meaning through so many layers is bound to lead to some confusion. In the case of the words “happy”, “content” and “euphoric”, we can easily figure out some kind of progression where one is in some sense more desirable than another, but the difference between “rich” and “wealthy” is much more subtle.
The Connection Between Money and Happiness
This is a secret to many people who are managing to get by without owning all that they desire: the poor care desperately about money every day, while the rich barely give it a thought. The difference is simply that the former are anxious about obtaining more money, while this isn’t really a concern once someone has reached their financial goals. There’s also a huge difference in attitudes toward spending: it’s a source of dread when your budget is very limited and the future uncertain, but a decision that can be weighed calmly when you have cash in the bank. In fact, more well-off people often end up spending less than those less fortunate. You don’t need cab fare when you own a car, nor have to bother with health insurance if you can be sure of paying any bills that arise out of pocket, nor pay income tax if you don’t have to work.
Having More by Wanting Less
Obviously, it is far better to be one of the haves than one of the have-nots, but the distinction comes down to two main factors as far as real happiness is concerned: uncertainty about the future and the freedom to do what you choose.
If someone earns $50,000 per month but owes $1,000,000 to the bank, he may be rich but he is not wealthy. He might lose his job, or live through a real estate crash, and go bankrupt. If he decides to devote the next three months to learning oil painting or exploring East Asia, he will have to quit his job, give up much of his retirement fund and try to sell a house that’s probably bigger than he needs, anyway. Such a person is neither free nor secure, and if he prefers to spend his money on objects rather than experiences, chances are that he’s not very happy, either.
The same person can be wealthy if he has a secure, non-salary income of $5,000 per month and no debts or obligations. This is not enough to service the mortgage on a mansion, but nobody really needs a mansion if he’s happy with something less ostentatious. In addition, since he’s not tied to a job 240 days per year, there’s little stopping him from living wherever he finds most comfortable, or even travel around until this becomes boring. Caviar and champagne might be a little pricey on a fixed income, but some people see them more as fashion accessories than delicacies, and there are plenty of those that can be prepared on a budget, anyway. Most of all, he is free in terms of time. If he wants to supplement his income by taking a job or by other means, he can do so.
The Time Value of Money
This term means something else in investment theory, but is often overlooked when it comes to personal financial planning. The wrong thing is always prone to happening at the wrong time: illness in the family, company layoffs or falling victim to some financial shenanigans. In this case, it will not be important how much someone used to earn or hoped to have, but a question of the difference between assets and liabilities, divided by expenses minus income. This gives a simple figure for the time value of money: how long you can afford to keep eating with a roof over your head.
This is one reason both notorious gangsters and famous investors have spent years in houses much cheaper than what they could afford: they preferred to maximize their income through investing their assets. Their expenses stayed constant while they paid off their liabilities, until one day they were magically, suddenly, very wealthy. There is no mystery to doing this; it’s just how math works.
Of course, there is one very important principle involved: don’t try to impress others with the things you own. If your happiness is dependent on what the neighbors think of your economic status, things can only go wrong in a number of ways. Buying houses and cars with assets you don’t have based on income you hope for will make you less wealthy, less free and secure, and less rich as well.