I came across an interesting definition of (financial) wealth recently in The Rules of Wealth: A Personal Code for Prosperity (Rules Series)
Here is the quote from Rule 2 “Decide on your definition of wealth”, pg. 8:
I have a wealthy and extremely generous friend who says that he knew long ago when he was starting out in business that he would consider he had made enough when he wasn’t living off the money he had amassed (which we call his capital). Nor would he be living off the interest on his capital. No, he would consider himself wealthy when he was living on the interest on the interest of his capital.
Wow. I’ve never thought of financial wealth in that way before. Let’s do some quick calculations. I know that I can live a comfortable humble life on about $38,000 per year before tax. If this was the interest on my interest, then assuming that my interest on my capital was getting a modest 5% return, my yearly interest on my capital must amount to $38,000.00/0.05 = $760,000.00. If my capital was also generating a 5% return, then my capital would be $760,000.00/0.05 = $15,200,000.00 — now that’s a handsome sum of money to accumulate!
This definition of financial wealth is interesting — by never touching your capital and by not touching the interest on your capital, you’re building a strong security barrier around your “nest egg”. Assuming you don’t make any horrific financial decisions, you can add the interest on your capital back into your capital. So your capital continues to grow, untouched, following the law of compound interest.
Sounds great. Now let’s assume it’s 2011(like now!) and that we have an administration—that is looking ways to take your capital(oh like they wouldn’t do that!)…hmmm that makes for a little different scenario.
What would be a more stealth approach—I’ll take my answer off the air…
or maybe we could elect constitutional conservatives who believe in freedom!!
Hi, James,
Of course the scenario described in the post is simplified. Political events can drastically change one’s circumstances (e.g., what happened to many people during WII under Nazi lead Germany). However, the post highlights an important concept – that of protecting your capital with as many legal and ethical walls as possible. The tax and political situation in every country is different, so different strategies for protecting your financial wealth will have to be used. The wealth concept of interest on interest for when you are financially wealthy can still provide a nice framework while applying these other legal and ethical wealth protection strategies.
Thanks for your comment.
M.E.B.