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Personal Finance

The 7 levels of wealth: How much money do you need to be happy?

When it comes to money, there are a few famous sayings that describe that our rather complex relationship with it.

For example: ‘Money can’t buy you happiness,’ but at the same time, ‘I’d rather cry in my Ferrari than on a bus.’

We all know that money truly isn’t everything. Yet for many people, much of our life here is spent working for it, chasing after it, and jealousy hoarding it. So how much money do you actually need to be happy?

According to a well-known study in the U.S. by Angus Deaton, the 2015 Nobel laureate in economics, he found that the correlation between emotional wellbeing and annual income tops out at US$75,000. In other words, even if you earned a higher annual income, it wouldn’t make you any much happier. However, to put US$75,000 into context, that was more than double the U.S. median annual income in 2009 when the study was completed. (Singapore’s 2021 annual median income is S$56,160, so make of that what you will.)

But instead of comparing your salary with your peers and striving to reach some magical number in order to be happy, I find it more useful to think of money (or wealth) in terms of levels. There are seven levels in all, and each level corresponds to a certain financial station in your life. The higher the level, the more autonomy you have over your financial life. At the same time, you don’t need to advance through all the levels to be happy; it’s perfectly fine to reach a certain higher level and be happy living there.

Here are the seven levels:

1. Dependence

You are still dependent on someone else to provide for you. If you’re a young child, this is entirely fine. But if you’re a grown-up, you probably do not want to stay at this level for too long. Most adults would be unhappy staying at this level.

2. Survival

You earn just enough income to cover your expenses. You are able to pay all your bills, but you do not have enough money left over to save. Nonetheless, you no longer require someone to financially support you. At the same time, some individuals may lead a flashy lifestyle but find themselves stuck at this level. Even though they drive a nice car and wear nice clothes, they may be one paycheque away from financial trouble.

3. Stability

You consistently earn enough money to cover your expenses and have enough left over to start saving. You have at least six months’ worth of living expenses in your emergency fund, so even if you somehow lose your primary source of income, you have six months to get yourself back on track. You also manage your debt well and are on track to pay off your loans in due time. It is at this level that your stress levels about money start to come down.

4. Security

With a stable income and enough savings in the bank, you can now look forward to growing your wealth and planning your retirement. The extra funds you have now can be invested in securities (no pun intended) that suit your risk profile and financial goals. The more money you set aside for the right investments, the faster you can reach your goals. At this level, you’re happy with the safety and security that money affords you.

5. Independence

You have steadily invested for a number of years and built a portfolio of solid, long-term investments that pay you enough passive income to cover your day-to-day living expenses into your retirement (or you have enough to liquidate to do the same). This essentially means that you no longer need to work another day in your life if you choose to; you can now rely on your investments to fund your lifestyle.

6. Freedom

You have continued to grow your wealth to a scale where your investments and passive income can now easily fund your preferred lifestyle. Whether it’s travel around the world, luxury goods, or unique experiences, you now have the wealth to pursue your dreams and aspirations. This is a level many people dream about, but many never attain.

7. Abundance

The haves and the have-yachts. You have more than you will ever need. At this level, your focus will be how you can be a proper steward for your wealth and the legacy you want to leave behind for future generations.

Advancing through the levels of wealth

You will notice a common thread that runs through the latter levels of wealth from financial security to financial abundance: investing. Investing is key to advancing through the levels of wealth because of these four reasons:

1. Your income is limited if you do not invest. As a worker whose income is tied to the number of hours you work, the only way to make more money is to spend more time working for it. But no matter how hard or long you want to work, there’s a cap to how many hours you can work in a day. Pretty soon you’ll hit a physical limit that no one can overcome.

2. Investing gives you potentially unlimited, passive income. Unlike being tied to a job that makes you trade a finite resource, time, for money, investing gives you the ability to make ‘unlimited’ passive income. The more you invest successfully, the more wealth and income you’ll make. And because it’s your money (instead of you) working for you, your investments will generate passive income for you whether you’re enjoying a holiday, sleeping, or when you’re retired.

3. You can’t work forever. There will come a time when you can’t physically work anymore. If you didn’t invest, the moment you stop working is the moment you stop making money. In other words, you need your investments to provide you with passive income to fund your living expenses when you retire.

4. Inflation. Every dollar you save will only be worth about 61 cents in 10 years’ time at an annual inflation rate of 5%. That’s almost half your wealth gone! On the other, inflation actually helps investors. As prices of goods and services rise year after year, so do the sales and profits of the biggest companies in the world and in turn their stock prices. That’s why the stock market always rises in a stable inflationary environment over the long run. Rather than let inflation eat away at your wealth as a saver, why not let inflation help you as an investor?

Where can you find your happiness?

Financial happiness is ultimately a very personal thing. Most people would be unhappy being stuck at the first 2-3 levels of wealth. But beyond that, I believe many people can find their happiness at each level of wealth. Some are contented with financial security and the simpler things in life. A few may have the ambition to achieve financial freedom or abundance (as long as it doesn’t make you unhappy in the pursuit of it). While others may think financial independence is the sweet spot.

At the end of the day, you decide which level you’re happy at — and investing is the key to reaching there.

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This article was written in collaboration with Tiger Brokers. All views expressed in the article are based solely on The Fifth Person’s independent opinion.

The content is provided for entertainment & informational use only. The information and data used are for purposes of illustration only. No content herein shall be considered an offer, solicitation or recommendation for the purchase or sale of securities, futures, or other investment products. All information and data, if any, are for reference only and past performance should not be viewed as an indicator of future results. It is not a guarantee for future results. Investments in stocks, options, ETFs, and other instruments are subject to risks, including possible loss of the amount invested. The value of investments may fluctuate and as a result, clients may lose the value of their investment. Please consult your financial adviser as to the suitability of any investment. This advertisement has not been reviewed by the Monetary Authority of Singapore.

Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

3 Comments

  1. The article on The 7 Levels of Wealth is worth reading by all ages. It is a life journey. I don’t think many people look at it in the way as Adam.

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