When Does Rich Become Wealthy?
This small thought came to me after having a twitter convo with a good friend (@sh3n3rd) on twitter. We were talking about what the American government spent most of their money on last year. Not surprisingly it was on the war in Iraq. A staggering $3 trillion was spent on it.
This of course spawned the thought of what you could do with 3 trillion tax free dollars. Well, we were toying with the idea of buying the moon, the Internet and the worlds entire telecom industry. This would of course be quite a feat. to do however it wouldn’t be possible.
What IS possible to do however is to send a man to mars 500 times. Meaning, the estimated cost for sending a man on a round trip travel to mars (and this is what NASA to date has calculated) is 6 billion dollars off of their 15 billion annual budget.
Also, the Americans spent 62.5 times as much money on the war in Iraq than Bill Gates entire fortune was at the estimated time in the end of 2008. Bill Gates was the richest man in the world in 2008.
This was however not the thought I got when the conversation was over. It was (as the title implies) When Does Rich Become Wealthy?
You might think it is one and the same but if you think about it, is it really? There are certain factors that play in when you say that someone is rich and wealthy. These factors are somewhat blurry as rich can mean so many thing except money. But let’s think about it from a money point of view right now.
I played with the idea of trying to figure out an algorithm where I would be able to determine exactly when I would be rich and when I would go from being rich to wealthy. This is what I came up with.
Ok, I think this algorithm requires some explenation. First off, when I am talking about rich I mean a healthy and abundant living where money is central to your everyday happiness. What I’m saying is, in my algorithm I assume rich means living comfortably in luxury without spending money on too unnecessary things.
Here’s the factors:
B = Bills – All combined bills per month.
LQ = Life Quality – Money to spend on everyday things per day.
UE = Unexpected Expenses – Unforseen expenses each month.
MEA = Milestone Expenses Avarage - Milestone event expenses such as Marriage, Kids Graduation etc.
T = Times – Number of accured times.
LE = Life Expectancy – How long you plan to live.
B – Here’s how you calculate you monthly bill expenses. You have to pick your lifestyle so to speak. How much will your house cost monthly? Add it then to your telephone bill, your Internet bill, water & power…everything you see yourself paying monthly and you’ll get your monthly calculated bill expenses.
LQ – Life quality is everything that you would feel is over the top expenses. Such as luxurious clothes, cars, trips etc. Whatever you feel is necessary for you to have in your life without saying -”I’m gonna buy an island!”. If you include a luxury car, be sure to estimate it’s “daily” cost. Not many people cash a car straight off. Don’t forget gas as well.
UE – Here goes all of the things you don’t want to pay for. Water pumps breaking, a flat tyre, divorce. All things bad pretty much.
MEA – In everyone’s life there are milestones. Events that are extraordinary compared to your everyday living. These events are for example marriage, your kids graduating or starting college, a trip to space (with Virgin Galactic) or even your own death (you wouldn’t want your relatives to pay for it right). The calculated cost (as an average) for each milestone event would for example be marriage = $20.000, college = $30.000/year*3 and then dividing those by the number of events you had, in this example 2. You then have the average (which in this case would be $25.000) for each event.
T – How many times these extraordinary events are likely to happen during the span of your lifetime.
LE – OK, this one is pure estimate. Look back into your line of relatives and see how long they lived. For example, my great grand dad died at 98, my grandma just turned 90 but my grandfather died at 72. So there I have somewhat of a guide estimate to how long I can expect to live if I take care of myself. So let’s say 85 for me.
So, let’s see how much money would make me RICH. Everything above that would make me wealthy. Remember, this algorithm calculates the amount it would take for me to live luxuriously without having to worry about money ever again.
So, let’s see if I can put my numbers in to this algorithm and see what my amount would be. I will present them in a list before I attempt to incorporate them into my algorithm.
The Equation
B – My estimated dream location of a house would be the hills in Hollywood, Los Angeles. A medium size house, let’s say 6 bedrooms and 4 baths would cost about $3.5 million. The calculated monthly cost for that would then be…$23.228,46 per month (I will go ahead and round it up to $23.229). This is also including insurance. Then it is Water & Power: $300 per month. Phone, Cellphone, Internet, Garbage pickup, Gardening, Cable-TV: $1.275 per month.
B = $24.804
LQ – Now my life quality. OK, I’d like to buy my favorite car (actually have two but I will settle for one this time around). It’s a Porsche 911, the cost for it would be around $75.000 and with a down payment of 10% I’d probably end up with a monthly cost for it around $1.200. Then it’s spending money. Ok, I’d like to eat out almost everyday cause I love hanging out with my friends and I love to socialize. 30 days * $100 which is $3.000 per month. This is lunch, dinner, coffee’s all included. Then it is al those small things, you know. The gadgets, the shoes, the clothes, gas, travels and stuff. I’d be happy if I can afford $500 a day. This is then $15.000 per month. Now we should bring this down to what the daily expense money would be. $19.200 / 30 = $640.
LQ = $640
UE – And then it is that sucky part. No one wants to include it but it’s a factor no one can get around. The unexpected expenses. The car need service cause of of a sudden breakdown or a collisions. The water pump goes “kabang” or a window gets smashed in because your kids were playing baseball in the yard. This is the hardest of all of the estimates but it’s better to be safe then sorry as they say. I will go ahead and say I want a safety budget of about $500 a month. This should cover any expenses that might arise.
UE = $500
MEA – This one is the more exiting one. I mean, how many times do you get to see your kids graduate (of course this depends on the amount of kids you expect to put in to the world). I’d like to have 2 kids. This would put the cost to: $30.000 for college / kid and an additional $30.000 to put them through school each. $120.000. I’d like to get married and girls always want a big wedding, right? So, this is a no brainer. $50.000 would be a great wedding I guess. Graduation and Birthday parties in a lifetime would be around $150.000 to get them somewhat extraordinary. I include my kids weddings as well as I probably would want to pitch in. Then the inevitable. My funeral. Well, I’d like to pay for it myself and I’d like it to be somewhat f a party so $30.000 would be alright. Then all expenses is taken care of I guess.
MEA = $350.000 and an average per event would be ($350.000/156=$2.244) *$2.244 per milestone event.
*I want to point out the reason why I did the algorithm this way. It’s to get a clearer overview on what and where things happen in life to easier plot out a lifetime event overview. I am fully aware that I could have skipped calculating the average event cost but I wanted to have better control over the numbers.
T - The number of estimated lifetime milestone events. In this case I have 156 including all my two kids birthdays, their marriage, my marriage, my wife’s birthday and also my own funeral and my two kids graduations.
T = 156
LE – Well, as explained earlier in this article I estimated ti live until I am 85. (With a simple look into your relatives past and present you can easily estimate your own life expectancy. Don’t forget to have a positive outlook on it as well.)
LE = 85
So there! Now I have all the numbers and are ready to put them into my little algorithm. Let’s see how much money I would need to call myself rich. YES!
There! So, I would $46.016.144 to call myself rich. At this amount I could live exactly how I would want to every day for the rest of my life. It’s easy to take this a step further by dividing this first in to years and then into months. You then have what you would need to earn each month in order to fill your needs living like this.
Let’s do it.
Yup, $45.113 is the projected salary per month I would need to cover all my expenses. Now I have a goal to work towards. LOL I am just a LITTLE bit off right now but if I really do my homework and really work hard everyday I might just get there. Will you?
Have fun!
This is the perfect mixture of brilliant, amusing, entertaining, and NERDTASTIC!! (I’m a sucker for a good algorighm)
It’s so much fun to know that our conversation sparked the thought processes which led to this post. I’m so honored and happy to call you friend!! I measure “wealth” intangibly – the value of connections and people in my world.
But I wouldn’t turn down a Porsche………………
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October 21st, 2010 at 5:30 pm
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Beautiful piece, really well thought out.
That’s “only” a yearly salary of $541,356.
You can do it!
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October 21st, 2010 at 5:54 pm
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sh3n3rd – Thanks! haha, yeah I tend to look at the worl din numbers. Must be a disorder of some kind.
Ezra Butler – Thank you sir! Yeah I know, it shouldn’t be that hard to accomlish! Working on it! Really I am!
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I think $3 trillion is a number that is sourced from Stiglitz’s recent book “the Three Trillion Dollar War.” It should probably be noted that that’s a high end estimate for the total cost of the entire war, not last year’s spending total. I can’t vouch for the accuracy ofthis site, necessarily, as I just did a google search for “federal budget pie chart,” but given the posture that the site I’ve linked adopts…it seems unlikely that they would understate federal military expenditures, and they only have ~$1.5 trillion for the entire military for fiscal 2009.
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oak – That’s a very good point. Thanks you! I will look in to the matter and see if I can get a closer estimate on how much their total spending on the was in Iraq was during 2008.
Thanks!
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I agree – beautifully and thoroughly written piece. I can’t even begin to fathom what that would look like, 3 Trillion $ – although you can see what a Billion $ looks like here: http://tr.im/bsv0
For the U.S. (my country) – I really cannot get my head wrapped around just how much debt we are in with China and any other country that has loaned the U.S. money. Then the horrible thoughts kick in – What happens when China has had enough and decides to cash in it’s chips?
I look forward to doing the formula for myself – appreciate all the hard work (makes my brain hurt, totally right brained, ie Creative geek) – and will pass it along. Good job my friend!
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Funny article! Now you have an aim in your life! The best would be to win the lottery
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This is clever. You actually need to earn a tad bit more per month. If your LE is 85, you have to subtract your current age.
Assuming you’re 35 years old, you have 50 years left.
Here is the modified formula:
((24804.0*12.0)+(640.0*365.0)+(500.0*12.0))*50.0+(2244.*156.0)
This gives you 27212464 which, when divided thusly:
(27212464/50)/12
yields 45354.
That’s an additional 7.92 per day.
You could always cut back on lattes
Cheers,
Mitch
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I simply love mathematical thinking… indeed you are an exceptional dude with a nice quantity of gray mass actually working to figure out, richness from wealthy… (pardon my english im Spanish speaking) Im actually going throught a really tough time moneywise, im still trying to figure out how to make a diference wealthy wise… and I think you just nail it here with this amazing formula!
Thanks and I let you know how my life is turning out…
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I plan to live forever!!
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wealthy is the point where you dont worry about being rich. warren buffett does not worry about puff daddy but puff daddy worries about warren buffet…catch my drift ?
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A great way to wrap your head around large sums of money:
$1,000,000 = spending $1,000/day for 1,000 days, or about 2yrs and 9 months.
Thus, $1,000,000,000 would take 2,740 years @ the same rate.
1 trillion dollars is enough to give every citizen of NYC $100 a day, every day for the next 3 years and 4 months.
Any way you look at it, it’s a lot of money. But I wouldn’t turn it down ;^)
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I thought this link was going to bring me to a date when your(aka rich)bank account was set to a million (wealthy).
Bummer dude. you lost me at algorithm.
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Lolz what about the Time value of money??? Looks like the algoritm does not take that into account. Surely a $100 after 85 years is not same as a value of $100 today.
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