The real meaning of wealth has to do with goals

What do you think about when you hear the word wealth? Really, think about it for a moment and write down a couple things that come to mind.

Ok, so I bet most of you conjured up images like Donald Trump, a mansion from MTV Cribs, or Scrooge McDuck swimming in his money bin.

And that’s perfectly in line with what most people think. When I do a Google image search for wealth, some of the first results are money, a mansion with a pool, a fancy sports car, and my favorite, a rich family in a country club toasting champagne over a flower centerpiece.

What this tells me is that we generally think of wealth as the ability to do expensive activities. In other words, wealth means having a high net worth.

Net worth is an important wealth measure to government agencies and academic researchers. Net worth is often the primary wealth measure because it is easy to calculate, it increases when people do good things like save more or earn more, and it is a key determinant of status. There are many resources to improve your net worth like NetworthIQ, a community of bloggers who dispense tips about your career, investments, and saving strategies.

And there is a comforting trend: The median net worth in America has been steadily increasing over the past twenty years. So are we happier? Studies are mixed, but overall, it doesn’t appear so.

Americans are less happy now than thirty years ago due to longer work hours. Even more disconcerting is that joint study in the periodical Science shows that richer people now are not much happier “moment-to-moment” than less wealthy individuals. The authors even say “effect of income on life satisfaction seems to be transient.”

What is going on? Why doesn’t higher net worth translate to more happiness?

I think part of the answer has been known since at least Ancient Greek in the writings of Aesop in the story of The Miser and his Gold:

Once upon a time there was a Miser who used to hide his gold at the foot of a tree in his garden; but every week he used to go and dig it up and gloat over his gains. A robber, who had noticed this, went and dug up the gold and decamped with it. When the Miser next came to gloat over his treasures, he found nothing but the empty hole. He tore his hair, and raised such an outcry that all the neighbors came around him, and he told them how he used to come and visit his gold. “Did you ever take any of it out?” asked one of them.

“Nay,” said he, “I only came to look at it.”

“Then come again and look at the hole,” said a neighbor; “it will do you just as much good.”

Wealth unused might as well not exist.

I take away two main lessons from the story about why the Miser’s gold (his high net worth) did not lead to happiness.

1. Money is a means to an end.

Personal finance is about using money for the things you care about. Net worth informs you on how much money you have, not whether you are enjoying the money. If the Miser had used some gold for a nice meal on the town, his net worth would have decreased, but would he have been happier?

2. Net worth can be lost if poorly protected (risky investments or lack of insurance)

The Miser was foolish to put his money in the tree since it was easily stolen by the robber. Some people today are just as foolish protecting their assets, leaving them prey to modern robbers like shady CEOs. If you don’t lower your risk through stock diversification and safer investments, you can quickly lose a lot of money in the wake of an Enron-like accounting scandal, or company layoff.

What’s the Answer?

How could the Miser have been better off, and what can you do about it? For starters, redefine wealth as financial fulfillment, and then start writing specific goals.

Goals help you answer: why do you want money? It is usually to accomplish some thing you want now, like to buy an engagement ring, or get an Apple iPhone, or to pay off credit card debt. But you likely also want money for the future to buy a beach side house in Hawaii and support your children’s education.

For me, wealth is simply accomplishing these financial goals.

Naturally, before I can accomplish them, I spend a few minutes to write them down. This is perhaps the most important step you can take in acquiring wealth.

I write down short-term goals for the next three to six months, followed by medium term goals of one to five years, followed by long term goals. I try to make the goals precise so I have a plan of action, and of course, I review the goals a couple times a year.

I started writing goals during high school and still have the records with me. To give you flavor, here are a couple short to medium term goals I wrote down during college:

–By graduation, be knowledgeable in investments other than stocks.

–Look into jobs. Start considering what I want to do and how I can find a high paying job that satisfies it. For instance, if I want to be a math professor, research how I can consult to supplement income.

I am happy to say I’ve accomplished these goals. The act of writing them and having a plan pushed me in the right path.

In the first goal, I became more knowledgeable through reading books, taking classes, and asking my richer relatives how they manage their money. It is amazing how much you can learn simply by asking. I didn’t have the sharpest questions, but people were very helpful since they were impressed some one my age was asking.

For the second goal, I used my college’s career center, went to various job fairs, and talked to people I knew who were enjoying their jobs. I eventually decided on a corporate job over academia thanks to candid advice from my advisor. And I got a really great job since I focused on what I wanted to do instead of how much money the job would offer. I eliminated certain high-paying jobs and focused on the jobs I would actually enjoy.

Did eliminating jobs like investment banking lower my net worth? Absolutely. And I don’t care. Since I enjoyed my job that paid reasonably well, I was able to get some thing better: achieve wealth.