Being wealthy is not determined by the amount in your paycheck. So says Scott Galloway, a serial entrepreneur who reportedly sold his company, L2, Inc., for more than $130 million.
“What is the definition of wealthy? The definition of affluent is having passive income that is larger than your burn.” Galloway suggests spending less than you earn. Galloway cites his father and stepmother as ideal examples. They each receive $48,000 per year in social security and pension income.
“They spend forty thousand dollars per year. They are wealthy. They have enough money without having to leave the house to work. In September, Galloway spoke with CNBC Make It. Nevertheless, Galloway claims that even millionaires can be “poor” if their expenses are high enough.
“I also have friends here in New York who make between $1 million and $3 million a year as investment bankers or law firm partners,” Galloway says, referring to earnings that would place them in the top 1% of all wage earners in the US, according to October 2018 Economic Policy Institute research.
But, according to Galloway, “between alimony to their ex-wife, their house in the Hamptons, their fat co-op on the Upper West Side [of Manhattan], and private school tuition, they may make $2 million, but they spend [$]2.1 million — they are poor because they have the stress of knowing that if the economy hiccups or they lose their job, there are deep s—.”
To sum up, earning a lot of money does not make you “rich” if you spend more than you earn and rely on a wage. Galloway advises: “Concentrate on your burn.
And have an honest dialogue with yourself about achieving actual wealth and being rich, which is when your passive income from rental properties and [stock] dividends from some fraction of the money you get from stocks exceeds your burn.”
At the same time, resist the temptation to let your spending outpace your earnings. “It’s also easy to fall into the trap of believing that as I get older, I get more amazing and make more money,” says Galloway, a marketing professor at NYU Stern School of Business.
“Children are preoccupied with their money. Adults are likewise concerned with the other side of the ledger — particularly “r”-burning.” The trick, according to Galloway, is to start saving a little bit each month while you are young. “So, how do you maximize your chances of being rich while having no microphone security at some point?
Most of us feel that when we are younger, we will have the big win, hit home runs, and have a large liquidity event. But, once again, presume that this will not occur, as Galahad explains.
Thus, “every month, pay yourself first. Make an effort to save a little money. Saving a little money at a young age can go a long way if you don’t have that large liquidity event, “Galloway explains.
“Then I can promise you that time will fly by and your savings will grow faster than you expect. So it’s difficult, and I’m not claiming that most people have the discipline to do it.
Those who have the discipline to put a little bit away every month and every day and start focused on building passive income will be affluent, regardless of whether they have that huge hit.”