Stuart Zadel talks about the three levels of wealth. And he’s starting with the first one in this post: security.
Let’s talk about wealth. I want to give you a working definition of wealth. Here’s my working definition. You don’t have to jot it down but instinctively here is what it is, a sufficient amount of money invested at a high enough rate of return that you can live the lifestyle you desire indefinitely without having to work.
MY WORKING DEFINITION OF WEALTH
This is my working definition of wealth and we’re going to work with this right now. We’re going to do some stuff with it, you’re going to be writing some numbers. It’s a sufficient sum of money invested at a high enough rate of return to maintain the lifestyle you desire indefinitely, without having to work.
I like work, I like hard work and I’ll do it my whole life. If I wasn’t doing this, I’ll be farming, I love growing stuff, I love chopping trees – not live ones. Dead ones. And I love that idea. I love physical work, working with nature – I love it. So, that’s what I would do if I didn’t have this mission. Now, there’s a keyword in this and that word is indefinitely.
So, what does that imply in this statement? If we put the word indefinitely, what does that imply? What has to happen? It means one or two things. Either this is astronomical sum of money that will last you the rest of your lifetime or it doesn’t have to be that big provided it goes up with inflation.
Does anyone know an asset class that has tracked about 2% to 3% above inflation for the last 200 years in Australia? Property. And the rents go with it. Now, it doesn’t go symmetrically but it does go with it and it doesn’t happen in all places but this is our working definition. Now, I said, there’s a blue pill and there’s a red pill. We’ll give you the blue pill and I’ll talk a little bit about the red pill.
Here we go.
THE THREE LEVELS OF WEALTH
I’m going to give you 3 options here. Step 1, you want to get to is called security. I’m going to ask you to do some work now. Ladies and gentlemen, I want you now to think about how much money you spend right now per month. How much money do you spent per month to live right now. So, how much is your rent or your home loan, how much you spent on transport and travel, your cars and your food, how much do you spend on clothing, how much do you spend on entertainment and how much do you spend on other stuff as well. I want you to write a figure down for me. It’s just for you. It’s not for anyone else’s eyes, it’s just for your eyes. Roughly how much money do you spend a month now that you need to live on? Go ahead and write that down.
Another way to work it out, if you want 60 grand a year and you spend 60 grand a year, you can roughly say I’m spending 60 divide it by 12, so you’re spending about 5 grand a month. Cool. So, everyone come up with their figure. It’s called your monthly cash burn rate. What is the rate that you’re burning through money in your current lifestyle? Everyone got their idea of their monthly figure? Everyone got one? Has anyone got not one yet? Cool. Now, I want you to times (multiply) that by 3. So, if it’s 5 grand a month for you or 3 grand a month or 10 grand a month, times it by 3. That is your first point of call I’m going to call Security. Why?
SECURITY
Because let’s say something happened and your company went out of business next week and you lost your job. Let’s say something happened to your business and it closed its stores on Monday for some reason. Or that a massive competitor opened up across the street and took your whole business. Let’s say something happened. Three months of monthly burn is what you need to be considered at least reasonably secure and you’ve got 12 weeks to sort it out. Does that make sense? So, that’s your first point of call, Security. That’s not lifetime security. It’s some form of security.
Who would be comfortable with that sum of money accessible right now in their life? Cool. Who wouldn’t? This is the sum. Good question. So, you roughly call this is your first point of call ‘Security’.
Read The Levels of Wealth Series.
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