People seek universal answers to personal finance questions, but the correct answer almost always starts with “it depends.”  What is good advice for one person may be terrible for another person.  This fact is often overstated, though.  For each question there tends to be a small number of important factors that determine the correct answer.  One such factor is your current wealth level.  In his book The Wealth Ladder , Nick Maggiulli explores how your current wealth level affects the financial choices you should make. Maggiulli refers to his book as “a grand unifying framework that will fundamentally change how you think about wealth and how to build it.”  On one level, this sounds a little grandiose.  However, it can be challenging to get through to people who seek universal answers that don’t exist.  These people need to be hit over the head with the idea that your best choices going forward depend on your current stage of wealth accumulation. ...

Please welcome a person I’ll call John Doe.  The following “interview” is loosely based on a real conversation with an acquaintance. Michael James:  Hello, John.  Thanks for agreeing to discuss your ideas on wealth inequality. John Doe:  I’m glad to be here. MJ:  Let’s get right to it.  How can we solve the wealth inequality problem? JD:  Nobody should be allowed to have more than a million dollars. MJ:  Interesting.  Some people already have more than a million dollars.  What should we do about this? JD:  Take it away. MJ:  So, somebody should take away the excess above a million dollars.  Who should do that? JD:  The government. MJ:  I have some questions about how this would play out.  Let’s look at a specific case.  You work for the federal government, and your pension is currently worth about $1.2 million.  You also have about $400,000 of equity in your house.  It would be easy for the go...

“I see that you are indifferent about money, which is a characteristic rather of those who have inherited their fortunes than of those who have acquired them; the makers of fortunes have a second love of money as a creation of their own, resembling the affections of authors for their own poems, or of parents for their children, besides that natural love of it for the sake of use and profit which is common to them and all men. And hence, they are very bad company, for they can talk of nothing but the praises of wealth.” – Socrates, Plato’s Republic Ouch. That hit close too home for me. I built my own savings rather than inheriting it. I see my savings as my own creation, and I probably talk about money more than many in my life would like. I tend to like hearing the old proverb, “shirtsleeves to shirtsleeves in three generations,” because it sets the builders of wealth ahead of those who inherit and squander wealth. But Socrates sees this very differently. He prefers those wi...

Back in 1996, the book The Millionaire Next Door was wildly successful. I recall enjoying it without thinking too critically about its messages. The latest follow-up book in this millionaire series is The Next Millionaire Next Door , written mainly by Sarah Stanley Fallaw, daughter of one of the earlier book’s authors, Thomas J. Stanley. I enjoyed this book as well, but mainly for the interesting personal stories of millionaires’ journeys. The book is based on surveys of millionaires. As with the first book, this one attempts to use the collected data to draw conclusions about how people become wealthy. This presents a number of challenges. A big challenge is that the data is all self-reported. What people say is often very different from reality. For example, when asked about investment fees, “33% of [millionaires] paid zero.” But how many just don’t know they pay fees? Among millionaires, “luck was rated among the least important success factors, while being well-discip...

I’m getting to like Mark Carney more and more. He was recently quoted as saying “Real wealth is built through innovation, and it’s gained through hard work.”. He’s spot on with the real source of improvements to our lives over long periods of time. Commenting on Canadian housing prices, he continued “It’s not through some magical asset inflation.” On a macroeconomic scale, the wealth gains we’ve had over the decades have been driven by hard work and innovations that make our lives easier and better. These innovations destroy some jobs and create others. The net effect is that we collectively get more for less effort. When governments create jobs through make-work projects or financial stimulus, we are getting short-term solutions. True long-term improvements come from innovation. When it comes to promoting or thwarting innovation there are no purely good actors or bad actors, but generally speaking, the enemies of innovation are large organizations that fight to maintain th...

The word “millionaire” is mainly used loosely to mean a person with so much money that he or she can spend far more than the average person with no fear of ever going broke. Increasingly, this loose definition does not match up with the more precise definition of a person with a net worth of at least $1 million. Consider the hypothetical couple, Sam and Christie, both 56 years old. They met working for the same employer and have 3 children, two of whom are still attending university. Their employer is having tough times and they both got forced into early retirement. Unfortunately for them, their skills are mostly useless now that the entire industry they worked in has collapsed. Fortunately, though, they are collecting a defined-benefit pension of $5500 per month. Using a rule of thumb that an indexed pension is worth about 15 years’ worth of payments, their pensions have an actuarial value of $990,000. Sam and Christie live in a house worth $450,000, but their mortgage is $...

U.S. President Obama’s plan to apply a “Buffett tax” has been widely described as a millionaire tax. But it doesn’t apply to those who have a net worth of a million dollars; it only kicks in for those whose income is a million dollars per year. These are two very different things. According to Wikipedia and U.S. census information, one out of every 11 U.S. households has a net worth of a million dollars or more. However, only 1 out of every 230 households has $30 million or more, which is closer to the wealth level needed to generate a million dollars in income per year. Coming back to Canada, many government workers retire with a pension worth more than a million dollars, but I’m sure that most of them would say they aren’t rich. We’re used to thinking of millionaires as wealthy people, but those who have just $1 million in total assets between a house and retirement savings are quite ordinary. It is very likely that you routinely meet millionaires, but you may not often co...

I had a family member tell me recently that her feeling of wealth has almost nothing to do with the size of her portfolio. Long term savings are just numbers on a computer screen. Whether she feels rich or poor is driven by just a couple of things: 1. Debts 2. Cash in a regular bank account This means that transferring money from her bank account to her RRSP makes her feel less wealthy. In a sense, the money is gone even though it is now poised to grow over time. On one hand, this all seems very irrational, but on the other hand I’m impressed that she understands herself quite well. One consequence of her formula for feeling wealthy is that leverage is a problem. With leverage she’d have a large debt with no offsetting pile of cash in a bank account. Have you figured out the drivers for your feelings of being rich or poor?

Most of us dream of living the life of a millionaire. Many of us regularly buy lottery tickets, and more of us buy them when jackpots get larger than normal. However, few of us have a good sense of what is truly a large amount of money. Imagine a young guy named Jack who is 25 years old and starting a new job. We look into a crystal ball and see that Jack will average an inflation-adjusted income of $50,000 per year for the next 40 years. If you’ve never done the math, it can be surprising to realize that this amounts to two million of today’s dollars. Now if Jack were to win $1 million in a lottery, this would be only half as much as his total 40-year income. Even with investment returns, Jack would risk running out of money if he were to quit his job and spend $50,000 per year. Even if he kept his job, he would risk running out of money if he spent $100,000 per year. So, unless Jack spends his winnings quite modestly, his good fortune will be temporary, and the money will be go...