a group of people holding money in their hands by M Jahid courtesy of Unsplash.

The 3 Traits of Wealth – and the One Trait High Income Earners Abuse the Most

Matt Corthell |

There are three things that wealthy people share. The collective attainment of these three traits will provide an emotional sense of wealth and monetary achievement. The three traits go toward creating a definition of wealth, which I define as: the ability to live life as you choose without the need to work.

Solvency

Solvency is defined as having assets valued more than any liabilities outstanding. When the reverse is true, wealth is certainly not present. To increase solvency, increase assets and decrease debts. This is best tracked by reviewing your net worth over time. As your net worth increases, it becomes more and more solvent.

Solvency is the best measure of wealth, but it may not give the person who is solvent a sense of wealth. See below.

Liquidity

Liquidity is the ease with which you can convert assets to cash. Say you have an original Edison Ticker tape (think of the old cartoons where Wall Street types are reading the price quotes on paper), a house or a stock. A stock can be sold on all business days at all business hours and assuming it is a large name, it will have a readily available market. A house will take some time to get the cash from it. You need to list it, stage it, find some buyers, may need to arrange financing and then close. An antique may have significant value, but it may require an auction to capture that value. What if that auction is held annually?

Say we have one person who has a bill for $50,000 and has a home worth $1 million. Another person with the same bill has a $500k home and $500k in investments. Despite being worth the same, the second person is far more liquid and has a far more straightforward way to pay that debt.

Cashflow

The final factor is the regularity and amount of cash that comes to you. This is what we call cashflow. When cashflow comes from a job, it gives people a sense of wealth without having it!

Say you have a person making $300k that goes on a bit of a spending spree. A house or two, a couple of nice cars and a few premium vacations are all attractive items. In addition, there are regular expenses, leaving little solvency as assets nearly match debts, and little cash in the bank leaving low liquidity. High income earners can succumb to the temptation that this presents.

Despite that, a person in this situation will often feel a sense of wealth because they are making all the payments. It all works for now, but if there is a plan to retire or slow down at some point, there is little left over to plan for that day.

What do you do if your wealth faces an issue from the three traits?

  • Solvency

Insolvency, when debts exceed assets, is the most difficult situation. In an extreme case it would be resolved through bankruptcy. In a lesser case, growing income and cutting expenses to increase the ability to pay debts would be recommended.

  • Liquidity

When liquidity is strained there are a few options. If you are quite solvent and have good cash flow it may be worth looking into credit lines or repositioning some assets into more liquid positions. Most people should maintain 3 to 6 months of spending for adequate liquidity.

  • Cashflow

When cashflow is tight a few things can be done. If you’re solvent, you can sell assets to pay off loans and reduce debt payments, increasing cashflow. Alternatively, you can lower elective spending or increase income.

Summary

Having your solvency, liquidity and cash flow in sync, along with thorough planning for your income level, will go a long way toward providing you with an emotional sense of wealth and monetary achievement.

Financial Advisor

The above is for informational purposes only. Looking for a review of your situation? Feel free to schedule a meeting with us to review your situation. To see more content like this follow us on LinkedIn.

 

Disclosures: Images and text may be generated in part with GPT-4, OpenAI’s large-scale language-generation model. Upon generating Wooster Corthell reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.