More than a decade ago I read the Idiots Guide to Getting Rich. The book primarily spoke about stock investing rather than real estate but the one thing that stood out from the book was introducing the 5 stages of wealth. I currently measure my wealth building by those 5 stages and now I wish to share it! Here they are:
Wealth Stage 1
At this stage you are able to maintain your standard of living and are able to save a minimum of 20 percent or more of your income. We can call that your target savings rate. It can be 30, 40, or even 50 percent of your income. In this stage you will also be making investment decisions once you have sufficient savings. If you are not at stage 1 yet then you have to either lower your standard of living or increase your pay with a better job or by working more.
Wealth Stage 2
At this stage, the investments done in the first stage have been compounding enough where the returns equal your savings rate. In essence you have DOUBLED YOUR SAVINGS RATE. In this stage you continue to invest your money in compounding vehicles like real estate, stocks, commodities, etc…
Wealth Stage 3
At this stage your investment returns are large enough to cover your standard of living and any inflation. At this point you can continue to work or not. Working is a choice rather than a necessity. There is also more freedom at this stage. Retirement, starting a business, following your passion are all viable options at this stage. According to Larry Waschka only about 5% of the population ever get to this stage. (I reached this stage at the age of 33 but my goal was to get there by 40, realized it 7 years early.)
Wealth Stage 4
At this stage your investments have grown large enough where they cover upgrading to an even higher standard of living with all of the benefits of Stage 3. You can spend more freely, travel, basically reaching a dream lifestyle and not be so worried about spending. (I have not quite reached this stage but hope to reach it with the next 5 years.)
Wealth Stage 5
At this stage you have more money than you know what to do with. You can choose any lifestyle that you desire.
There you have it, the 5 Stages of Wealth. It truly is a great measure because there is no mention of specific amounts of money or a specific type of standard of living. People will have to make their own judgment calls about what is a sufficient standard of living or how much is alot depending on the dynamics of where they live. Continue wealth building!