Do you qualify as 'rich'?
Morningstar's Sim Mody speaks with Mark LaMonica about the varying definitions of rich.
The following interview is based on this article by Morningstar's Mark LaMonica.
Simonelle Mody: Mark, to begin with. What is the official definition of being rich in Australia?
Mark LaMonica: Well, there is no official definition. So, I pointed out in this article that I wrote that there are number of different criteria that people use to say somebody is rich. So, when you go out and ask people, basically they fall in a couple different buckets. There is a salary bucket.
So, generally people say $150,000 or more a year. Now, $137,000 gets you into the top 10% in Australia. But $150,000 is what people say. There is an asset test. So, people generally say if you have more than $1 million in assets, you're rich. And then in a very uniquely Australian thing, if you own your home outright, people consider you rich.
So, these are all very different measures and there's different percentages of the population that qualify based on which of these measures you use.
Mody: And your article mentions being rich is largely an illusion. Could you perhaps elaborate on what you mean by that and how that illusion sometimes impacts people's financial goals and investment goals.
LaMonica: Yeah, absolutely. I think just going through the different definitions demonstrates that this is an illusion. I think that because there's no official definition and we cannot define what rich is, I think really people can classify other people as rich. But I think when they're thinking about it themselves, they're really thinking about a feeling. And money, of course, is a huge stressor for people. There's a lot of emotions attached with money. And so, I think really when people are thinking about what it is like to "be rich", I think what they're thinking about is that feeling of not worrying about money. And you see that in all sorts of different ways.
You see some people saying that that's going out to a restaurant and not looking at prices on a menu. You see it around people having the free time to make choices to spend with their family. You see it around people being able to, I guess, eliminate things in their lives that they don't want to do. So, whether that's hiring a cleaning service.
So, you see all these different markers that people have for being rich. But really, I think it's really that feeling of having more control over your life and not worrying about money and not being stressed about it.
Mody: So, you mentioned investing to get rich is a largely flawed philosophy, and I think this confuses some investors and upsets some preconceived notions. Could you perhaps discuss why the get rich mindset is counterproductive and how a sustainable approach would look?
LaMonica: Yeah, absolutely. So, I think we have to get back to why we set goals and not just investment goals but any goals in our life. We set goals because, one, we want to have something that provides a framework that can govern and guide our decision making. We want to provide motivation to keep going. And really this ambiguous term of rich doesn't do that.
So, in order to be successful in investing, it takes a lot of time, it takes consistency, it takes patience. Really to have that motivation to keep going, to be able to come up with a plan of how much you're going to save, how you're going to invest. You do need a concrete goal. And the problem is that investing to get rich, even if that's what people really want, if you have that, there's nothing that governs your decision making. Anything you want to do. There's no structure around what you do, what you invest in, how often you change investments, how much you save. Anything you want to do, any action is justified by this ambiguous goal. So, really, if you want to get "rich", come up with an actual number and work towards that number.
Mody: So, given the numerous definitions we've discussed about being rich, I'd like to throw it back to you and ask how do you yourself define being rich and how does your investment philosophy sit within this?
LaMonica: Yeah, absolutely. So, I think my personal overarching goal is to continue to give myself more options in life. And of course, when we think about financial freedom, which is another kind of ambiguous goal that people have, what is freedom? Well, freedom is choice. So, freedom is being able to have options in life, whether you decide to take them or not. And so, really how that informs my goal setting and the way that I invest is for me, what do options mean? Well, it means more income coming in. I'm an income investor, so I'm trying to generate that passive income. Now I set very specific goals. I come up with a savings plan. I come up with investment strategies that largely is consistent to try to hit those goals. They keep providing me with more flexibility, more options in life.
So that's really the approach that I take. I may choose to spend my time continuing to work. I may choose not to, but that's very different than, of course, having to work, living paycheck to paycheck to try to put food on the table. So that's really the way that I think about it.
Mody: So, given that owning a property is outright one of the measures of being rich in Australia and some Morningstar investors already know that you don't own a property in Sydney. How do you feel about this perception of wealth being based around property?
LaMonica: Yeah, absolutely. So, I think there's two sides to it. I do agree that if we look at my definition of rich, really flexibility and options, well, what's the number one expense for most people? It is their mortgage payment or rent. And so, obviously, removing that, owning your house outright, provides a lot of flexibility. Now, I think where I'm coming from and my decisions around property is I think to get to that point where you own your property outright, you are removing a lot of flexibility from your life. Because if we think about it, number one, obviously mortgage payments in Australia are generally higher than renting the equivalent. So, that's one increase in cash flow that you have to spend.
If you own a property, of course, anything goes wrong. There's maintenance and upkeep and renovations and everything else, conservative estimates that's 1% of the total property value per year. So, that's another drain on cash flows.
So, I think if somebody has a definition of being rich that is based on net worth, how can you grow your net worth as fast as possible? Well, as long as housing prices keep going up. So, way to increase your net worth a lot, I'm just worried about that period until you actually have it paid off and the impacts that would have on my life.
