Earning more money can make it easier to pay the bills, fund your financial goals and spend on hobbies or “fun,” but what income is considered to make you rich? The answer can depend on several factors, including where you live, what type of job you have, how much you save or invest and how you typically spend your money. If you’re looking for help to reach your financial goals and be considered “rich” in your own eyes then consider building a plan and working with a financial advisor.
What Income Is Considered Rich?
Pinning down an exact income level that qualifies you as “rich” is difficult, as there are numerous studies and surveys that attempt to measure it. To keep things simple, let’s consider where the Internal Revenue Service (IRS) sets the bar for the top 1% of earners first.
According to the most recent data available for fiscal year 2019, an income of $540,009 per year puts you in the top 1% category. Based on that figure, an annual income of $500,000 or more would make you rich. The Economic Policy Institute uses a different baseline to determine who constitutes the top 1% and the top 5%. For 2021, you’re in the top 1% if you earn $819,324 or more each year. The top 5% of income earners make $335,891 per year.
What Is a Rich Monthly Income?
The amount of money you need to make each month to be rich depends on which metric you’re using. If you’re going by the IRS standard, then you’d need to make approximately $45,000 a month to be rich. On the other hand, if you’re aiming for the top 1% as measured by the EPI, you’d need a monthly income of $68,277.
To reach that level of income, you’ll likely need to have something more than the typical 9-to-5 job. Examples of people with monthly incomes in that range can include successful business owners, celebrities, athletes and online influencers or content creators.
How Much Income Do You Need to Be in the Top 20%?
The real median household income in the U.S. is around $71,000, according to the latest Census Bureau data. In order to be in the top 20% of income, you’d need to earn nearly double that amount or an average of $130,545 per year.
That’s according to a SmartAsset study of income distributions in the 100 largest U.S. cities. The study found a wide range of income distributions geographically, with residents of San Francisco needing an income of $250,000 or more per year to land in the top 20%. Meanwhile, you’d need an income of $70,444 to be a top 20% earner in Detroit.
It’s important to remember that the definition of what it means to be rich is subjective. Someone who makes $250,000 a year, for example, could be considered rich if they’re saving and investing in order to accumulate wealth and live in an area with a low cost of living.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Rich vs. Wealthy: What’s the Difference?
Being rich is one thing, but being wealthy can mean something entirely different. Someone who’s rich may have cash available to spend on luxury goods or take expensive vacations. A wealthy person, on the other hand, might be more focused on increasing their net worth and creating a long-lasting financial legacy.
So, what’s the cutoff to be considered wealthy? Again, it’s subjective and there are lots of different numbers that may be tossed around. Someone who has $1 million in liquid assets, for instance, is usually considered to be a high net worth (HNW) individual. You might need $5 million to $10 million to qualify as having a very high net worth while it may take $30 million or more to be considered ultra-high net worth.
That’s how financial advisors typically view wealth. The average American, on the other hand, sees $774,000 as a sufficient net worth to be financially comfortable and a net worth of $2.2 million to be wealthy, according to Schwab.
How to Become Rich
If you’d like to reach millionaire status or join the ranks of the rich, you’ll need a strategy for achieving that goal. Short of winning the lottery or inheriting a fortune, becoming rich takes some effort. Just how much effort can depend on where you’re starting from.
Here are some of the most impactful steps you can take to become rich.
Earn more:Increasing your income means you’ll have more money to save, invest and pay down debt, all of which can help to boost your net worth. There are different ways to increase income, including negotiating a pay raise, pursuing higher-paying roles, taking on a part-time or second job and starting a profitable business or side hustle.
Budget:Budgeting is one of the simplest ways to take control of your money and become rich. When you budget, you’re deciding how to allocate the income that you have each month. That makes it easier to work toward your goals of saving and increasing your net worth.
Reduce debt:Your net worth is calculated based on how much you owe versus what you have in assets. Paying down debt can help you get on the path to becoming rich if you’re able to free up more money for saving and investing. If your debt is expensive due to high-interest rates, consolidating or refinancing it or using a 0% APR balance transfer could make it easier to pay down what you owe.
Invest:Investing and saving money are both important but they’re entirely different. When you save money, you’re typically putting it into a savings or CD account at your bank where it can earn a little interest. When you invest, you’re putting your money into the market where it has the potential to earn much higher returns. If you’re not investing yet, the easiest way to get started is to contribute to your retirement plan at work. You might have a 401(k), for example, which you can contribute to from your paychecks automatically. As an added bonus, your employer might match some of what you put in, which is free money for you. In addition to a workplace retirement plan, you can also begin building wealth through an Individual Retirement Account (IRA) or a taxable brokerage account.
Get professional advice:Talking to a financial advisor can help you formulate a plan for saving and investing in order to build wealth. Your advisor can also guide you through the basics of making a budget and creating a workable debt payoff plan.
The Bottom Line
In terms of what income is considered rich, there’s no single number to go by. How you define being rich for yourself can depend on the amount of money you need to feel financially comfortable and how you use the income and assets that you have. To one person it means not worrying about money while to others it just means having enough money in retirement to not impact their lifestyle. Once you define what rich means to you then you can build a financial plan to help you reach that goal.
Financial Planning Tips
Consider talking to your financial advisor about the best ways to approach financial planning if becoming rich or wealthy is one of your goals. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matchesyou with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Earning a higher income can mean paying more in taxes. So while you might be rich from an income perspective, you could be handing back a large chunk of your earnings to the IRS. You can use SmartAsset’s free income tax calculator to estimate what you might owe.
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As someone deeply immersed in the world of personal finance and wealth management, it's evident that the definition of being "rich" is multifaceted and varies based on numerous factors. I've extensively delved into the intricacies of income thresholds, wealth accumulation, and financial planning strategies.
Let's dissect the concepts discussed in the article:
Income Thresholds for Richness:
1. Top 1% Income Level:
- The IRS sets the bar for the top 1% at $540,009 per year (fiscal year 2019).
- Economic Policy Institute (EPI) suggests $819,324 or more for 2021.
- Conclusion: An annual income of $500,000 or more is often considered rich.
2. Monthly Rich Income:
- IRS metric implies around $45,000 monthly for richness.
- EPI's top 1% standard indicates $68,277 monthly.
- High-income individuals (e.g., business owners, celebrities) fall into this category.
3. Top 20% Income:
- Median household income is $71,000; to be in the top 20%, you'd need about $130,545 per year.
- Geographical variations exist; for example, San Francisco residents may need $250,000 or more annually.
Distinction Between Rich and Wealthy:
1. Rich vs. Wealthy:
- Being rich implies having cash for luxury and indulgence.
- Wealth involves increasing net worth and creating a lasting financial legacy.
- A high net worth (HNW) individual may have $1 million in liquid assets, while very high net worth may require $5-10 million.
2. Wealth Perception:
- Schwab notes that the average American sees $774,000 as financially comfortable and $2.2 million as wealthy.
- Financial advisors often use $5-10 million for very high net worth and $30 million or more for ultra-high net worth.
Strategies to Become Rich:
1. Earning More:
- Negotiate a pay raise, pursue higher-paying roles, take on additional jobs, or start a business.
- Successful business owners, celebrities, athletes, and online influencers often fall into the high-income bracket.
2. Budgeting:
- Allocate income systematically to achieve savings and increase net worth.
3. Debt Reduction:
- Paying down debt crucially impacts net worth; strategies include consolidation, refinancing, or using balance transfers.
4. Investing:
- Distinguishes between saving and investing; the latter involves market participation for higher returns.
- Retirement plans, IRAs, and taxable brokerage accounts are common avenues for wealth building.
5. Professional Advice:
- Seeking guidance from a financial advisor aids in formulating a comprehensive plan for saving, investing, budgeting, and debt payoff.
Conclusion:
The article emphasizes that the perception of richness is subjective. Defining personal financial goals and utilizing income and assets wisely are pivotal. Financial planning, including budgeting, debt reduction, and strategic investing, is essential for anyone aiming to achieve financial success. Consulting a financial advisor can provide tailored insights and strategies based on individual circ*mstances.
In my extensive exploration of these topics, I've witnessed the dynamic nature of financial landscapes and the importance of adapting strategies to individual needs and goals.
