What's your Number?

Im not one to post content from other people on my blog (no, it has nothing to do with how obviously good their content is as compared to mine) but this post deserves to read by the four people (yes New Reader I have included you as well) who frequent my evergreen blog. Why? Simply because it felt as though I had been looking at the bigger picture called life for a long time but reading this article made me feel like I have started looking at it with a new pair of glasses and suddenly now everything seems to be crystal clear. 

In fact this is only the second article (after the excellent Ode to nice guys) that I have shared so you know the bar that was set was really high.

A Former Goldman Banker Explains What It Really Means To Be Wealthy

Michael, Bankers Anonymous | Jan. 17, 2013, 11:33 AM | 56,653 | 38

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Back when I worked on the bond sales desk at Goldman, many of us talked about what our “Number“ was – the “Number” obviously representing “F--- You Money.”

“F--- You Money”, if you haven’t worked on Wall Street, represents the amount of money you’d need in order to professionally disregard anybody else’s needs.  In other words, the amount you need to walk away from your desk, go out the door, and never look back.

My sales partner, and friend, who I sat next to on the mortgage bond desk, kept a spreadsheet on his desktop calculating precisely how close he was at any given point to achieving his “Number.“  He’d been at Goldman (and another firm before that) longer than me, and he stayed about 5 years longer than I did.  Although I never came out and asked him directly after he left GS, I’m pretty sure he made his “Number.”

I left Goldman in 2004, long before earning my own personal “F--- You Money.”

Sometime after 9/11 happened I was no longer willing to live an unhappy daily life, focusing on delayed gratification, the key factor for me to accumulate enough for my “Number.”

I’ve been thinking about what it really means to be wealthy for a couple of reasons.  One, because its bonus day today at Goldman, and two, because I’m teaching a course this semester on personal finance. Preparing for this course has pushed me to reflect, before the college students ask me, on the best definition of wealthy.

My answer to them will be something like this:

   1. Wealthy can’t be determined by a single, static, net-worth number, because I know that Mike Tyson at one point earned $30 million per fight and over $300 million in his lifetime, but subsequently declared bankruptcy in 2003.  For some people, like Tyson, their number is larger than $300 million, and probably can never be achieved.

   2. What I know from the Tyson example is that on-going lifestyle expenses play a big role in determining  whether you are wealthy, at almost any level of asset accumulation.  Some people can be wealthy on an accumulated $3 million net worth, while other people can be poor and bankrupt with $300 million in earnings.

   3. 19^th Century English authors Jane Austen and Anthony Trollope tell me a great deal about how to understand wealth, and, in particular, the role of passive income.  At that time in England, the landed gentry earned passive income from family-owned real estate, real estate which would never be willingly sold. Unlike today, the landed gentry never calculated their net worth in terms of the real estate value, but only in terms of the passive annual income to be derived from the land.  Every hero and heroine of Austen and Trollope novels has an income, known to all polite society and expressed in thousands of pounds per year;  their “Number” follows them around as they seek appropriate romantic matches.  It’s as if they are marriage-seeking Sims with a number floating above their animated-avatar heads.

   4. One meaning of wealthy that exists in our popular culture is that if you are wealthy you never need to work again, like landed gentry.  Because 19th Century landed gentry did not work for a living, I like the analogy between the “Number” associated with every Austen and Trollope character, and “The Number” that we think makes us wealthy today.  The best way of knowing whether you’re wealthy, by this analogy, is to compare the passive income you derive from your assets on an annual basis with your yearly lifestyle expense.  If your passive income exceeds your expenses for the rest of your life, guess what?  You’re wealthy!   I specifically urge my Personal Finance students to look at it this way because, like the 19^th Century landed gentry, you shouldn’t depend on selling your assets to cover expenses, since that’s a non-sustainable practice.

   5. Time, specifically your expected life span, plays a big factor in my definition of wealthy.  If you have enough income or assets to cover your expenses for only the next three years, but you’re only going to live for one more year, you’re wealthy three times over!  If your passive income and assets are high right now, but will run out before you die, you’re far from wealthy.  A young person needs far more passive income and assets to cover them for their expected remaining life, while an older person may be much closer to wealthy – by my definition – as a result of having less time on earth.

   6. Passive income in modern times rarely derives solely from real estate income, but rather comes from many sources such as dividends, business profit-sharing, pensions, annuities, fixed income interest, and social security payments, in addition to traditional, real-estate derived income.

A More Nuanced Version of being wealthy doesn’t involve saying “F--- You” to work

Hold on there a moment!  I’m not done yet with my definition of wealthy.  My fullest definition of wealthy adds an important factor to the ‘Do you have enough to walk away from work?’ question.   After all, work gives meaning to life.  Work grounds us, puts us in the flow of society, and makes us feel useful to others.  Work in that sense is a good thing unto itself.  So how do I integrate that with my definition of being wealthy?

I think wealthy means not so much having “F--- You Money,” or reaching your “Number,” but rather having the option to choose work that you would do regardless of the level of compensation.  

So here it is, my definition of wealthy: If you have enough assets plus passive income to cover your personal lifestyle expenses for the rest of your life, and that money allows you to work at something you love – without concern for the amount of compensation – then you are wealthy.

Let’s say you love feeding the less fortunate.  If you have enough passive income in excess of your expenses that you could ladle soup to the homeless – even though that service pays you almost nothing – then you are wealthy.

If your greatest joy in life consists of reading novels and writing your memoirs every day, and you can live cheaply enough to make that happen for the rest of your life, then you are wealthy.

If you perform eye surgery for a living, and you live for the joy of returning sight to the blind, and you can afford to do so even if Medicare cuts your reimbursements to one-tenth of their current level, then you are wealthy.

If you would sell bonds for a living, for the sheer joy itself – the act of efficiently allocating capital or whatever you tell yourself – then you don’t care what your actual bonus is today from Goldman.  So what if you’re down 25% from last year, or you’re up 100%?  Who cares?   You love it!  If you’d do it anyway, and you can afford to do it, then you are a wealthy person.

If, however, you’re working at something, day in and day out, that you would quit as soon as you made enough money, I would argue you’re far from wealthy.  You may be covering your costs and accumulating assets, but you’re even farther from the ultimate goal of wealth than you think.