Transcription
You've worked hard, saved money, maybe you've hit some big financial milestones lately. Like maybe you've earned your first $100K or $500K, you have your debt paid off, or maybe you just started a high-paying job. But yet you don't feel rich; instead, you feel like you're just getting by, like you should have more money by now. So why does this happen? And why do people doing fine financially feel like they're not rich enough? This is more common than you think, and in today's video, I want to break down these seven reasons why you might not feel rich even if you are.
The first of these reasons is something called the Horizon effect. This is the psychological phenomenon where wealth feels just out of reach. So everything you want is waiting for you beyond the horizon; yet, every time you arrive at said horizon, you end up back to where you started, and the new horizon has shifted further and further out. Financial success just keeps getting redefined every time you hit a new milestone, and this is actually quite common. Consider the Charles Schwab study where Americans responded to a survey answering that you need $2.2 million to be wealthy. In fact, in this same study, many respondents already had high net worths, and those with more than $1 million in net worth still did not feel financially secure. So we don't really measure wealth by how much we already have; we measure it by how much more money we think we need. And the problem is that most people have no clue how much they think they need. The brain, then, is our biggest fallacy here. For example, do you remember when you were a kid and perhaps you got $20? That probably felt like an incredible amount of money. But as you age, you start to earn more money, and $20 just doesn't have the same effect that it used to when you were a kid. So, as you can see, the brain really adapts as quickly as possible. Or consider the fact that maybe saving $1,000 could have felt like a huge win at some point in your life, but these days it no longer even feels like anything significant. So how do we actually escape this psychological fallacy? I do have a few actionable tips. Number one: Define a "rich" number and write it down somewhere. How much would it cost you to live a comfortable life? Number two: You can do what I like to call a future lifestyle analysis. That's where you go into a spreadsheet and you write down what your desired lifestyle would cost for every single category in your life in order for you to feel rich. Now, don't go too crazy, but for example, if you usually spend $400 a month on eating out (couldn't be me!), maybe you perhaps double it for your desired experiment. If you spend $400 on a car payment, what would that look like if it were perhaps $700 a month? Do this for every category and then tally it up for your monthly and yearly spend. By doing this, you can figure out exactly how much you need, and often times it's usually a lot less than you actually think you need to be rich. And tip number three: To avoid the Horizon effect, try shifting your mindset from focusing on needing more money to focusing instead on how much more freedom you have now compared to, say, five years ago.
The second reason you may not feel rich even when you are is lifestyle creep. Your expenses have slowly crept up as you've made more money, and often times your expenses will rise to match your new income without you even realizing it. Your old lifestyle feels totally unacceptable now because you've been slowly upgrading everything. For example, for a long time in my life, I would not pay for any subscriptions at all, but these days I'm okay with a couple subscriptions like to test.com, or Netflix, or maybe even HBO Max. I now have that extra money to spend on subscriptions, so I feel like I can spend on it just because I can afford it. Perhaps when you weren't well off, you were eating at home every single meal, but now you eat out five times a week without thinking too much about it. You could have ditched Planet Fitness for Equinox, and while at first all these little upgrades feel like luxuries, soon they feel super necessary, and cutting back is way too hard on your ego. The real way, then, to feel wealthy isn't just making more money; it's actually widening the gap between what you earn and what you need to be happy. That's why those people that continually live below their means will always feel more psychologically rich than those that live paycheck to paycheck to maintain a certain lifestyle.
Reason number three why you might be not feeling as rich as you are is that your wealth is locked in illiquid assets—assets like real estate, long-term bonds, or CDs maturing in a few years from now. If you feel cash poor but asset rich, this can actually lead to feelings of financial inadequacy. Or perhaps you feel imprisoned to the life that you've built up because you can't just drop everything and travel the world for a year. There is a psychological comfort that having access to liquidity offers you, and even if you do have assets, how quickly they are convertible to cash is an important factor. This helps provide you a sense of security and flexibility because having some cash allows you so much more freedom in many ways. A common form of advice that I see too much on the internet is, "Oh my God, why do you have so much cash? It's not doing anything for you; it should be at least invested, or else you aren't being optimal with your money." And you can probably find tons of online trolls out there who preach having 0% cash at all times, and you should be invested with all of your money. But I think you should have enough cash that makes you feel comfortable and allows for not only emergencies but investment opportunities you might see in any markets, plus the fact that having some extra cash will reduce your stress overall. If you're trying to figure out what a healthy amount of cash is for you, a lot of experts recommend at minimum a 3- to 6-month emergency fund, plus any cash you want to hold on the sidelines for peace of mind or investment opportunities. One sign you might be saving too much cash, though, is if you're saving to save with no specific goal in mind. You want to have enough liquidity to feel financially secure, but not so much that it holds you back from wealth building; and that's the true balance that you need to strike. So if you have like $80,000 under your mattress but you only spend $1,000 a month, that might be a sign that you have too much cash.
Reason number four why you still don't feel as rich as you already are is that you perhaps rely too much on an active income. Even if you are earning a lot of income, if your entire life depends on that sole active income, it can feel quite burdensome. I think a lot of people define being rich as having enough passive income off of their investments to live their desired life without having to work. In fact, there's an entire subreddit community dedicated to those that earn high incomes yet don't feel rich yet, and they are called "Henry's," which actually stands for "high earner, not rich yet." It's a common term to describe those that have high-paying jobs but don't feel rich enough yet to actually live off their investments. And as true as the name is, the top post in the last month of this subreddit is actually quite hilarious. It says, "Quote: This sub seems to have shifted from its initial purpose. Uh, why is this sub full of rich people? We get it; your net worth is $15 million, and you make $500K a year. You're not a Henry." In fact, many people on this sub are millionaires or claiming to be and saying they're not rich. Am I wrong in this perception? The fact that this post is the top post in the last month with more than 1,600 upvotes kind of proves the thesis of this video—so much that everyone feels like they aren't rich enough. So thank you, Reddit! Now, active income can feel like a trap because of many reasons. First, if you ever lose your job, that can be a very stressful time because it could put your finances at risk, especially without a backup plan. Second, your time isn't fully yours yet. If you need to work to survive, you're not financially free, no matter how high your salary is. Financial freedom is defined as "Quote: A state where you have complete control over your finances, allowing you to make choices based on your desires and goals rather than being limited by how much things cost." So in order to achieve this state of freedom, we want to build streams of passive income, whether that be from dividend stocks, rental properties, REITs, businesses, or business ventures that pay you dividends. Having multiple sources of income will mean that we aren't reliant on one single active income to get us through life. Another way to achieve freedom faster is to simply lower the amount you spend on your lifestyle. If you don't need that much, then there's going to be less pressure overall.
Reason number five that you may not feel rich when you already are is perhaps you are falling for the social comparison trap. If you've ever looked at someone else's life and thought, "Darn, why don't I have that yet?" that's falling for the trap itself already. The thing about money and wealth is that it's often relative, and if you compare yourself to the wrong people, it can really just be a reinforcing cycle of negativity. A person making $100K per year might feel super rich in a small town, but if you live in New York or San Francisco (where I live), many people don't think that they can actually live on $100K per year here. Similarly, a person that makes $10,000 per year may not feel rich at all, but if we compare them to the distribution of global wealth, you can see that more than half of global adults make less than $10,000 per year. This really gives you some perspective on how we're doing in the US and other top-earning countries. And sometimes, if you are in a position where you're making even a median income in a country like the United States, it's really good to just acknowledge how grateful we should be. Another huge problem with the social comparison trap is simply social media. There's just so much of it these days—there's Instagram, there's Facebook, there's Twitter or X, there's TikTok, there's Reddit—there's just so many. People are posting their luxury vacations, their new cars, and expensive homes. But who is posting an Instagram story about their credit card debt balance? Maybe 0.001% are like, "Hey, look, I've got $3,000 in credit card debt." I mean, no one's doing that, but perhaps it could be a new trend. People are attention seekers and want to be perceived positively, so on social media you are really only seeing a highlight reel. Spending habits are often invisible, so if you are building your wealth in the shadows, you really can't compare yourself to someone that might be the type to flash their wealth online and in person. A much healthier person to compare yourself to is yourself, just five years ago. Are you in a better position today than you were five years ago? If the answer is yes, then I think you should pat yourself on the back because that's what really matters—if you're actually progressing your financial life or not. So bottom line: True wealth is measured by freedom and security, and not just lifestyle flexing.
Reason number six today is that you haven't defined what rich means to you. We've talked a lot about what makes someone rich so far in this video, but have you actually taken the time to define it for yourself yet? If rich to you just means having more money than you do now, you'll never arrive at that destination. There's also a big difference in not only being rich but "feeling" rich. For example, being rich could be an objective number, like you hit a certain net worth, like $2 million, but feeling rich could mean that you have financial freedom, security, and no anxiety about your finances. Just like in our earlier examples, having $2 million might not make you feel rich because you could be comparing yourself to the wrong people, or maybe because it could all be tied up in illiquid assets. So instead, when it comes to defining what rich means to us, we should really focus on the feeling of rich and how we can achieve this feeling of rich because then, in my opinion, we've really beaten the game. If you can wake up free of stress and anxiety every single day and work on the things you want to work on, then I think that is the true definition of rich. Because at the end of the day, if you're just using a net worth number or your income number to define rich, it's just not going to work. A person who needs $100,000 per year to live but has investments generating them $150,000 per year is, in my opinion, richer than someone earning half a million dollars a year but spending it all. Before we get into point number seven today, I want to tell you guys about my free newsletter, Hump Days. It's where I come out with business news, economic news, as well as personal finance information twice per week, completely for free. We have over 65,500 subscribers in that email newsletter, and I think you would really like that newsletter if you like the content we put out on this channel. I'll leave a link down below for that, and I hope to see you guys in the newsletter. And that brings me to point number seven today: A huge reason why people don't feel rich yet is that they are often living above their means. I've briefly touched upon this concept once in this video already, but I wanted to leave it as point number seven because of how important it is. If you're able to spend less money as your baseline when it comes to feeling rich, you'll feel richer faster. There are also other benefits to spending less money as a whole. One is that you will retire much faster because you won't need as much money in retirement. According to the 4% rule, which is something I've talked about on this channel, you can technically call yourself retired when you're able to withdraw 4% of your nest egg every single year and live off of that. So if your lifestyle costs you $50,000 a year, then you will need a nest egg of $1.25 million that allows you to withdraw $50K per year and live off your investments. Imagine if your lifestyle costs you $100,000 per year; then you're going to need $2.5 million in order to withdraw at that healthy 4% rate. The blog Mr. Money Mustache has an amazing quote, though: It says, "Quote: If you are spending 0% of your income—like you live for free somehow—and you can maintain this after retirement, you can retire right now. So your working career can be zero." Now, not many people can live for free unless you're a baby, but I think the point here is that there is a relationship between saving money and when you can retire. The more you save, the sooner you retire, and hopefully it's obvious to you that the less you spend, the more that you can save, so it all just kind of works together. The main takeaway today for you is that the reason you don't feel rich isn't because you're not rich; it's probably due to factors that affect your psychology more than it does your bank account. If you enjoyed this video, make sure to check out my next video right here on why I believe looking poor is so important. It really ties into everything that we've talked about today. Make sure to follow me on Instagram and Twitter; I post there all the time, and I'll catch you in that video right there or a future one on the channel. All right, peace! [Music]