I have run across numerous articles, blog posts, and podcasts lately that discussed the significance — or lack thereof — of the $1 million milestone in 2020/2021. Since I have seen the topic discussed in several places lately, I figured I would take a deeper dive today and give my take. Is decamillionaire the new millionaire?
What is a Decamillionaire:
According to Investopedia, a decamillionaire is a term used for someone with a net worth of over $10 million of a given currency, most often US dollars, euros, or pounds sterling. [1] Conversely, a millionaire can be defined as someone with a net worth of $1 million or greater. In between the two would be a multimillionaire who is someone that has a net worth of $2 million or greater. Since a multimillionaire could technically have any sum of money $2 million or greater, a decamillionaire provides an additional delineation when defining levels of wealth.
The Importance of Net Worth:
Net worth is a key part to understanding your overall financial health. Many people tend to define financial success based upon their income rather than net worth. This is a mistake. Your income is an important part of your financial picture, but it is not an accurate indicator of your wealth. You can have a high income, but spend it all resulting in little to no assets. You can also own assets that retain little value or depreciate rapidly. For this reason, net worth is the financial indicator you SHOULD be using to gauge your financial health and track your progress.
How to Calculate Net Worth:
Net worth represents the value of all of your assets (i.e. what you own) less the value of all of your liabilities (i.e. what you owe). Most assets and liabilities are universally agreed upon (e.g. cash = asset and home mortgage = liability). However, there are a few areas — specifically with assets — where there is some debate on what to include and not include in your net worth calculation.
Below are examples of assets and liabilities that I WOULD include in my net worth calculation:
Assets
- Primary Home Value
- Other Real Estate Value – Commercial, Secondary Home, Rental Properties, Undeveloped Land
- Cash and Cash Equivalents
- Mutual Funds, Stocks, ETFs in Taxable Accounts & Retirement Accounts
- Bonds in Taxable Accounts & Retirement Accounts
- Cash Value Life Insurance
- Cryptocurrency
- Other Appreciating Assets (i.e. Art, Collectables, etc.)
- Business Equity
Liabilities
- Primary Home Mortgage
- Other Real Estate Mortgage(s)
- Auto Loans
- Personal Loans
- Student Loans
- Revolving Debt (i.e. Credit Cards)
- Other Debt
Assets Excluded from Net Worth Calculation
Below are examples of assets that I WOULD NOT include in my net worth calculation.
- Automobiles
- Jewelry
- Household Items (Electronics, Furniture)
- Other Depreciating Assets (ATVs, RVs, etc.)
- Term Life Insurance Value
A Note on Depreciating Assets
Many people include depreciating assets, jewelry, etc. in their net worth calculation. However, I choose to ignore depreciating assets when calculating my net worth and consider their value to be zero. If I were to ever sell them for a profit, I would then include the profit accordingly. If you do choose to include depreciating assets in your net worth, you must ensure you account for deprecation by updating their true value regularly to ensure you have an accurate net worth calculation.
A Note on Valuing Real Estate
I choose to value my primary home based upon the purchase price rather than current market value. This approach arguably runs contrary to popular opinion. Many people feel strongly that you should value your home and real estate based upon the current market value rather than original purchase price. If you are in this camp, I can’t argue against this approach — especially if you own real estate in a market where real estate appreciates rapidly. I personally choose to value my real estate using purchase price to (1) ensure I have a conservative approach to calculating my net worth and (2) to ensure that I avoid rapid changes in my net worth driven by real estate bubbles/crashes.
A Note on Cash Value of Life Insurance
It is important to point out here that you should only include the cash value of a whole life or universal life policy. You should NOT include the death benefit amount — only the cash value. You should also NOT include term life insurance since term life insurance policies do NOT have a cash value. Both of these points are fairly straight forward, but can be misunderstood when trying to accurately calculate your net worth.
An Alternative to Net Worth — Liquid Net Worth:
There is an alternative to net worth that is also important to understand and track, and that is liquid net worth. Liquid net worth represents the value of all of your assets that can be converted to cash quickly (i.e. what you own that is liquid) less the value of all of your liabilities (i.e. what you owe). The following are examples of assets that I WOULD include when calculating my liquid net worth since they are cash equivalents or can be converted to cash quickly:
- Cash and Cash Equivalents
- Mutual Funds, Stocks, ETFs in Taxable Accounts
- Bonds in Taxable Accounts
- Cryptocurrency
The following are examples of assets that I would NOT include in my liquid net worth calculation because they are physical assets and/or cannot be quickly converted to cash.
- Mutual Funds, Stocks, ETFs in Retirement Accounts like IRAs, 401ks, 403bs, etc.
- Bonds in Retirement Accounts Like IRAs, 401ks, 403bs, etc.
- Cash Value Life Insurance
- Primary Home
- Other Real Estate – Commercial, Secondary Home, Rental Properties, Undeveloped Land
- Other Appreciating Assets (i.e. Art, Collectables, etc.)
- Business Equity
The exclusion of retirement accounts in a liquid net worth calculation would be up for debate since technically the assets are liquid and could be sold for cash — net of any applicable penalties and taxes. However, I choose to exclude them in my liquid net worth calculation since it would take more than a few days to covert the assets to cash. You will find proponents of both calculation methodologies.
A 3rd Alternative – Invested Net Worth:
Net worth and liquid net worth are common ways to track your financial health and measure your wealth. There is also a third way, invested net worth. As the name implies, invested net worth represents the value of your invested assets less the value of all your liabilities. I include all invested assets in this calculation regardless of location or account to include pre-tax, post-tax, and retirement accounts. I do NOT include cash and cash equivalents since these funds are not being actively invested and will not experience growth based upon my investment forecast assumptions.
Do You Know Your Net Worth:
If you do not calculate and track your net worth, you are doing yourself a disservice. Knowing your net worth is key to understanding your financial state and progress as you pursue financial independence. I recommend that at a minimum you track your net worth. If possible, I recommend tracking all three of the above metrics — net worth, liquid net worth, and invested net worth. There are many templates you can find online, but all you really need is a simple Excel or Google Doc to get started.
What Does $1 Million Mean To You:
Now that we have a consistent baseline relative to net worth, let’s discuss the meaning of $1 million to YOU.
1 million of anything tends to have some level of significance to most people. 1 million dollars. 1 million users. 1 million downloads. 1 million followers. 1 million sales. I could go on and on listing milestones that are frequently associated with 1 million. It is everywhere, and typically represents a significant milestone in relation to one’s goals.
As a child, $1 million was the benchmark for anything money related. I can’t tell you how many times I made a pretend bet for $1 million as a child. In fact, if I added up every bet I made and lost for $1 million, I probably would be $1 billion in the hole today. As I grew older, the significance of $1 million continued to evolve. I dreamed of one day actually having $1 million dollars. Accumulating $1 million would mean “I had made it” from a financial perspective. It represented the pinnacle of financial success. It wasn’t until I began my career and my income began to rapidly increase that I began to see $1 million differently. It was at this point in my life that I gained a better appreciation for the value of a $1 both from an income and expense perspective. $1 million became MUCH more tangible.
According to a report from several years ago by Zippia, the average person earns ~ $2.7 million over his or her lifetime. [2] High Earners Not Rich Yet (HENRYs) are NOT average from a financial perspective since we earn an above average income. As a result, our lifetime earnings will be significantly higher. Of course — as you already know — more income doesn’t necessarily equate to greater wealth. You CAN be income rich AND asset poor. You can make $1 million a year and have a net worth of $0. Building wealth is a choice.
In becoming a HENRY in the pursuit of FI, I have come to realize that $1 million still has significance, but it is not the pinnacle of financial success I once thought it to be. Statistics would also support this. In 1980, there were about 500,000 millionaires in the US. [3] In 2020, that number ballooned to almost 22 million! [4] There are many factors feeding into this increase including but not limited to inflation, wage growth, 10+ year bull market, etc. The largest of those factors is arguably inflation since the value of a $1 over time has continued to diminish. Inflation is the silent killer that will rob you in the night if you are not careful.
Inflation in Action — $1 Million by Decade:
The chart below shows you the buying power of $1 million over the last 50 years (1970 – 2021 YTD). As you can see, based upon cumulative inflation, you would need more than $7 Million in 2021 to have the same purchasing power as $1 Million in 1970. This represents a cumulative rate of inflation of over 600% over the 50 year span.
| Year | Equivalent to $1 Million in 1970 | Cumulative Rate of Inflation |
| 1970 | $1,000,000 | 0% |
| 1980 | $2,100,000 | 112% |
| 1990 | $3,400,000 | 237% |
| 2000 | $4,400,000 | 344% |
| 2010 | $5,600,000 | 462% |
| 2020 | $6,700,000 | 567% |
| 2021 YTD | $7,100,000 | 607% |
If we narrow down to the last 30 years (1990 – 2021 YTD), the results are less dramatic because the cumulative rate of inflation has been less in relation to 1990. You would need ~ $2.1 million in 2021 to have the same purchasing power as $1 Million in 1990. Still a notable difference, but much less than the 50 year time period.
| Year | Equivalent to $1 Million in 1990 | Cumulative Rate of Inflation |
| 1990 | $1,000,000 | 0% |
| 2000 | $1,300,000 | 32% |
| 2010 | $1,700,000 | 67% |
| 2020 | $2,000,000 | 98% |
| 2021 YTD | $2,100,000 | 110% |
*** The calculator at https://www.usinflationcalculator.com/ was utilized to calculate all figures. All figures were rounded to the nearest $100,000. 2021 YTD includes the latest US government CPI data through September 2021.
Inflation can’t be ignored, and the charts above show you why. As the value of the $1 has continued to diminish over time, the value of becoming a millionaire has arguably diminished as well. This is where the decamillionaire argument comes into play. As with any argument, there are valid points on both sides, and much of it depends on circumstances. If you live in a low cost of living (LCOL) area, $1 million will go much farther than if you live in a high cost of living (HCOL) area. In addition to your cost of living, the location and type of assets you own also may play a significant role. $1 million in invested assets is typically not the same as $1 million in real estate from a return perspective. In addition, all real estate is not created equally. Even if a significant portion of your net worth is tied up in real estate, you may experience a higher return in a rapidly appreciating market when compared to a market where prices appreciate slowly over time or remain relatively stable.
In short — $1 million certainly has less buying power than 30, 40, or 50 years ago due to inflation. However, its significance in your life financially is driven by many factors that are unique to your circumstances including those noted above.
Is Decamillionaire the New Millionaire:
I personally think that the argument that a decamillionaire is the new millionaire is over-exaggerated. However, context is important. I live in a LCOL area where real estate is cheaper and appreciates less rapidly. My net worth is primarily tied up in stocks rather than real estate. For this reason, my overall net worth and my invested/liquid net worth are similar. I also have 50+ years left in my investing lifetime (hopefully). Since I do not plan to touch the majority of my invested assets for at least another 25 – 30 years, I have more time for the magic of compound interest to do it’s thing.
For these reasons, I still consider becoming a millionaire a significant milestone in one’s financial journey. Depending on your expenses, investing timeline, and other factors — $1 million can be the catalyst you need to achieve YOUR definition of financial success. Even a decamillionaire must first become a millionaire. They are both financial milestones on your journey from a HENRY to FI. The significance of each is based upon YOUR circumstances and YOUR goals. After all, personal finance is exactly that — personal.
Regards,
Henry
[1] https://www.investopedia.com/terms/d/decamillionaire.asp
[2] https://www.zippia.com/research/dead-end-careers/
[2] https://www.latimes.com/archives/la-xpm-1990-06-24-op-854-story.html
[3] https://www.statista.com/statistics/268411/countries-with-the-most-millionaires/