We learned in A Cyclical Tale the 4 stages of the successful wealth cycle and we learned in A Wealthy Tale the definition of wealthy.  This tale focuses on applying what we’ve learned by giving you what I call the wealth challenge.

The wealth challenge is easy.  I describe a situation for a typical investor and you have to determine if they are wealthy or wealth challenged.  A person that is wealth challenged is a person that doesn’t exhibit the type of behavior that leads to wealth.  See how good you are.  I give you my answers at the end of the tale and make sure to include my definition of wealth in your answers.  Just to make sure you know it, in my opinion a person is wealthy if they could stop working and live indefinitely from their investments and guaranteed inflows without having to lower their standard of living by earning 4% annually on their investments

1)      Betty is a retired 68 year old widow that, owns her house and car, has no debt, receives $3,000 month in social security and pension benefits, has about $500,000 in investments and spends about $2,500 month.  She has complete medical coverage, no life insurance nor long term care insurance

2)      John and his wife Sue are both self-employed physicians in their mid 40s that make almost $400,000 per year between them.  They have 3 young children in private schools and they plan on paying for their children’s college education.  They live in a $1.5 million dollar home with a $1.4 million dollar mortgage.  They have two leased luxury sedans for daily use and a leased SUV for weekend use.  They recently bought a second home at the shore for just under $1 million dollars with no down payment.  They are members of the local country club.  Last year they started a retirement plan and contributed $30,000 but this year they can’t because their expenses didn’t permit it.  They still have $90,000 in student loans outstanding and 6 credit cards with a total balance of $75,000 between the 6.  All told, their monthly after tax expenditures average about $18,000 per month.  John and Sue want to retire when they are 65.

3)      Billy is a 24-year old professional golfer that aspires to play on the PGA tour.  He is an only child, single, has no children, makes just under $25,000 a year playing golf and lives with his parents when he’s not traveling between golf tournaments.  His travel and living expenses exceed $60,000 per year.  Billy’s grandfather passed away when Billy was 19 years old and left a little over $2 million dollars in a trust for Billy’s benefit.

4)      Brenda and Eddie got married right out of high school and with the combination of part time jobs and student loans were able to graduate from college 5 years later.  They recently paid off their student loans and now each is saving 15% of every paycheck into their company retirement plan.  They have an asset allocation where they invest 70% of their money in stocks and 30% in bonds within their plan.  In addition, they want to start a family and feel the need to own a home before they have children.  They save an additional $1,500 per month towards their home ownership goal.  They have affordable health insurance, no life insurance, no credit card debt and they have two cars that are each worth less than $10,000 that they own outright.

If you answered that the widow Betty and the golfer Billy are wealthy, that Drs. John and Sue are wealth challenged, and that Brenda and Eddie while not yet wealthy are well on their way we agree.

Betty has a reliable source of income that won’t disappear, her lifestyle is such that she keeps her expenses low and her portfolio at 4% produces $20,000 per year of income that she simply reinvests so that it continues to grow.

John and Sue make a considerable income but their expenses are so high that they can’t even contribute to their retirement plans. If you liquidated or sold everything they own and paid off all their debts, they would have a negative net worth which means they couldn’t pay off what they owe.  On the outside, they appear to be wealthy but they are far from it.  They are wealth challenged and at their current and projected future spending rate the only hope that they have for achieving wealth is if their real estate goes up in value considerably, that they remain healthy which would let them work and earn a sizable income after they have paid for their children’s college and perhaps lowered their standard of living.  Everything has to work for these two to achieve wealth.  They can forget retiring at 65 unless they change their spending habits.

Billy is wealthy because even if he didn’t win any money at all as a professional golfer, his trust still generates about $80,000 per year using my 4% formula and is more than enough to cover his annual expenses of $60,000.  When Billy finally breaks through and we see him on TV we’ll know that grandpa was instrumental to Billy’s success.

Brenda and Eddie are wealth builders and are doing all the right things in order to achieve wealth.  They save, keep their expenses low, they have short-term and long-term goals, and they invest their money in a manner that seeks higher returns.  Young people should emulate these two.

Just remember that when it comes to wealth, appearances can be deceiving.

I would like any readers that are interested in submitting a hypothetical situation to contact us so that we can add your case to the wealth challenge library.  Please describe the situation and provide enough information so that a determination can be made.  When we have enough case studies I intend to build a wealth challenge calculator that will let you enter your own information and see where you fit in to the world of wealth.

Carlos Sera

Carlos Sera Founder of Sera Capital Management, LLC Co-Founder of Chicago Wealth Management, Inc. Registered Investment Advisor Speaker on Financial/Investment Planning Fluent in Spanish – First Generation Cuban/American Author of Financial Tales Blog Education Johns Hopkins University – BA – Natural Science – 1980 University of Rochester – MBA – Finance and Applied Economics – Honors – 1982 Find me on:  LinkedIn | Twitter

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