What is the definition of financial independence? What is the definition of wealth?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 509.2 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What is the definition of financial independence? What is the definition of wealth?
  • What are some psychological problems associated with being very rich?
  • What motivates people to become wealthy?
  • Why don’t you support taxing the rich more?

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Source for all answers – Adam Fayed’s Quora page.

What are some psychological problems associated with being very rich?

A few years ago I heard about a book written in South Korea.

The writer is an anonymous businessperson.

I don’t believe it has been translated into English.

I was told a great line from the book. The writer said that most people want to be rich or at least wealthy, but don’t like the “rich”, and actively criticize them.

It is something I have seen regularly in “real life”.

Namely, people who say they are against wealthy and/or rich people, and advocate for higher taxes and much else, but want to become wealthy themselves.

Ultimately, if you go into a business or investing endeavour and assume that most wealthy people are liars or worse, then it is less likely that you will do well compared to if you assume most are just people like everybody else or have done good for society.

But a small percentage of these people with such contradictory views do become very rich and/or wealth.

In which case, they might think they have done something morally wrong by becoming wealthy.

Charlie Munger speaks about it clearly here with his video on envy:

It has also be warned against by most traditional moral value systems:

So, envy is common, and always has been warned against.

A certain percentage of those envious people become very wealthy, and some start to feel guilty – “why am I doing so well when others are starving” and so on.

What is more, if you come from a place of envy, you are only likely to envy those who have more than you.

In other words, when you were poor you envied even people who have $1m in wealth and $300,000 a year of income.

Then when you have $5m, you envy those with $50m or more.

Beyond that, some other issues are:

  1. Trust. It gets harder to trust new people who come into your life
  2. Risks. If you grow a business, you face more potential liabilities like lawsuits, which can affect your mental health
  3. Purpose. If you get very rich and then quit your job, you might question your propose in life.

Ultimately, people can have psychological problems at any end of the income and wealth spectrum. You are actually more likely to have issues if you are struggling.

The difference is this. If you are happy poor or middle, you are likely to be very happy rich or very rich.

If you are unhappy and have psychological problems when poor, being rich likely won’t make the issue better.

It could even make it worse.

In many ways wealth just unmasks people. Ditto kindness. A kind person will be even kinder when they have more resources, as opposed to be unkind person.

If you imagine the people you least, and most, like, and then imagine them with loads of money, I am sure you could see what I mean.

What motivates people to become wealthy?

Most of the people who have became ultra-wealthy, such as billionaires, never dreamed they would become so wealthy when they were starting out.

The vast majority of very successful business owners, even those who are multi-millionaires and not just billionaires, aren’t only motivated by money.

Money might be one component of it, but other important things are:

  1. Financial freedom
  2. Enjoyment of the job/business
  3. Changing the industry or even the world
  4. Lifestyle considerations, such as an enhanced ability to travel for business.
  5. More spare time (eventually) if you decide to outsource or automate
  6. More control over your life
  7. The ability to create something from nothing
  8. Helping family members and friends
  9. Proving other people wrong
  10. Having a second career, especially if you come out of retirement to start something new.

When I interviewed Kevin O’Leary last year, he mentioned privately before the event about how getting fired when he was young motivated him to start his own business.

The freedom to call the shots was clearly a motivator, as he said publicly here:

I have spoken to several other people in similar situations, and this commonality is one thing that comes up again and again.

Many self-made business owners have some kind of trauma, such as humiliations, sackings, expulsion from school and many other things which drives them on.

We also have to remember

  1. Even for salaried workers, putting money aside for a comfortable retirement and being able to quit the day job if something changes, is a big motivator.
  2. You can walk away from things you don’t want to do if you have some security from wealth.
  3. It doesn’t have to be huge sums of money either to achieve some degree of financial autonomy.

What is the definition of financial independence? What is the definition of wealth?

The first one is kind easy for most people.

If you are able to live from your financial or business assets without working, then you are financially independent.

So, even somebody who earns $10,000 a year from assets in one of the cheapest parts of the world, is financially independent if their costs are $5,000.

Whereas, somebody who earns $1m after tax and spends $1m isn’t.

Of course, common sense dictates that you should add a conservative buffer in case something goes wrong.

Therefore, you should ideally need at least 20% over your basic living costs to be considered financially independent.

In terms of wealthy, definitions vary.

In the financial services industry, a high-net-worth individual is somebody who has assets worth over US$1 million.

That definition was a made a long time ago, so having US$1 million in liquid assets is sometimes used.

By liquid, I mean excluding real estate, businesses and pensions (401ks and the like). So, things like stock, bond and REIT ETFs, individual stocks and bonds, cash etc.

Anything you can sell and get hold of quickly, and liquidate without having to wait months or years.

In the modern day, liquid net worth is a more useful measurement, because you often can’t get access to things like pensions for decades, and might never find a buyer for land, property or a business.

An ultra-high-net-worth individual usually has investable assets in excess of $30 million.

Note all definitions are not focused on income, but rather assets and wealth.

People who gain wealth understand a basic truth – you can’t out-earn awful spending and investing habits just as you can’t out-run a bad diet.

There are many examples of high-income people with negative net worths, who are forced to declare bankruptcy.

A case in point is a majority of former top athletes declare bankruptcy after retirement – even the ones that earned tens of millions over their career.

This is usually because of a lack of financial planning, including not preparing for unexpected events.

Do the very wealthy in Monaco have to pay taxes?

If you are French, you pay taxes, thanks to this man:

If you are from a country which taxes based on citizenship (the United States and Eritrea for example) you can be taxed from your home country.

Most other nationalities don’t pay income and most forms of taxes.

Rents are taxed at 1%. Corporation tax can be as 33.33% if you make most of your money outside the country.

Obviously get formal tax advice if you are thinking about living in Monaco, both in Monaco and your country of citizenship, as I am not a tax advisor.

This is especially the case these days if you plan to still spend many days in your home country, or have a complicated situation.

The days of simplistic rules like you don’t pay taxes if you spend fewer than 90 or 183 days in a country has changed.

The UK, Canada, Australia and other governments have various ties tests.

Basically, the more ties and days you spend locally in the country, means the higher your tax risks.

If you are say British and only spend one or two weeks in the UK, with a Monaco tax residency, your risks for British taxes are very low, provided you don’t have many UK ties.

Converely, spending two months a year in the UK, doing loads of work during that time from home plus retaining many UK ties is risky.

In a post-Covid era governments also need money, so they will likely make the rules stricter in the future.

Why don’t you support taxing the rich more?

There are two main reasons.

Firstly, whatever the media says, taxes are very high for people in the middle, upper middle and higher income and wealth brackets already, in most advanced economies.

In most European countries, Australia and many parts of the US, the marginal higher rate is well above 40%, sometimes 50%+.

What is more, you already have indirect and direct taxes on wealth (stamp duty/buying taxes on property, dividend and capital gains taxes) and inheritance taxes which can be 40%-50% in some countries now.

It is also a misconception that all you need is a good tax lawyer and you can avoid loads of taxes. In most situations, this isn’t true, at least for individuals.

Consider this. Richard Branson lives in the BVI:

Sir James Ratcliffe, the richest UK person in the world, now lives in Monaco.

Eduardo Saverin, the co-founder of Facebook, gave up his US citizenship and residency years ago.

These people have billions, or tens of billions in some cases.

If it was so easy to avoid taxes whilst living in London , New York or Berlin, then why do people like this need to change their residency to pay fewer taxes?

Why is the second residency and citizenship industry so big and growing? There wouldn’t be a demand if the media narrative was correct.

This brings me to another point. If you raise taxes too much, more people will just change their residency.

We live in a world where more people can work remotely and have online businesses.

Americans can easily live in a place like Puerto Rico. Brits can easily live in the Channel Islands, without the need for a visa, just as the Beattles did in the 1960s when they left due to increasing taxes.

So, such a policy would be based on envy, not increasing revenue.

Look at a recent news story. Seems a Saudi Arabian football team is offering Ronaldo $250m+ a year to go there tax-free.

We live in a global world where competition for big businesses and wealth exists.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 551.2 million answers views on Quora.com and a widely sold book on Amazon and a contributor on Forbes.

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