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Tuesday, February 12, 2008

The Five Levels of Wealth

In the "Complete Idiot's Guide to Getting Rich" the author Larry Waschka describes five separate levels of wealth.

This book grabbed my attention when I bought awhile ago, frankly because at the time I though, heck if an idiot can do it, I'll be a bajillionaire! Not so fast Wile E Coyote, there is the little issue of following that ACME plan!

Here are the paraphrased outlined levels:

  1. Level 1 - You are able to maintain your standard of living while still saving your Target Saving Goal, which is the annual amount needed to fund your retirement.
  2. Level 2 - Your Investment Portfolio (could be 401k too) is large enough on its own to deliver a return large enough to cover your TSG and keep up with inflation.
  3. Level 3 - Your portfolio returns enough to cover your desired lifestyle and inflation.
  4. Level 4 - You have enough assets to produce a return big enough to increase your lifestyle, now and in the future, while keeping up with inflation.
  5. Level 5 - You have enough assets to produce a return well beyond what would could ever spend. You no longer have to work and can make large charitable gifts.

Quite a gap between Level One and Two, but this list makes sense from an investment focus. Once we are through Baby Step #2, paying off our consumer debt and Baby Step #3, saving 6-months worth of expenses we should be able to apply our snowball to reaching Level One.

Level Two is pretty tough. Given that we will try to deliver 8% returns we will need to have 12.5x our savings number to reach the goal. Say I wanted to save $20,000 per year, which means that I would need $250,000 saved. Not impossible, but like I said tough...

Level Three is gonna require some extra muscle. To replace $140K salary we would need the 12.5x again or $1.75 Million! To hit this I need to save $70K per year. Now compounding really helps here so it won't be actual salary savings used to do that, but it won't be easy at all.

Level Four is kind of based on your lifestyle choice, so if you have a high three reaching four is probably off. It is just you definition of what big is. For sake of comparison say I would like $200k. To pull that off I need a cool $2.5MM

Pipedream time. Level Five. Time to open the RacerX PF Memorial Library and Grille (the 'E' makes it Classy). I am saying...$100MM.

That is a fun exercise, but it really doesn't meet my personal goals. My goal is simple. Make sure that my family is taken care of and that we can spend our twilight years in comfort but not ostentatiously.

The only way we are gonna get there is to have that plan that is always a few steps ahead of us! It takes planning, budgeting, money management and most importantly...patience.


CatherineL said...

It sounds quite difficult to achieve.

They seem to be bringing out idiot guides for everything now. There's even one for wordpress.

RacerX said...

Here are two not yet available...at least to my knowledge:

1. Idiots Guide to Writing Idiot's Guides

2. Idiots guide to being an Idiot :)

Fiscal Musings said...

According to this list, I'm aiming for number 5 before all is said and done. Tough, yes, but doable in my mind.

RacerX said...

Good for you Fiscal! You have a really good head start on it, you can do it!

Thanks for visiting!

Anonymous said...

Is there an Idiot's Guide for people at Level 0?

Anonymous said...

"idiot's guide" - 4,059 hits in Amazon Books

RacerX said...

Nope - But after reading it, I can write it..."Get to Number One Quick"

Idiot's guide has that much, I bet the Dummies catalog of books is insane now!

Level 6 - Write a book about your other Five Levels!

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