The definition of a Millionaire takes many forms.

 

I like to define 3 levels of millionaires:

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Level 1: The “Technically a Millionaire” Millionaire:

 

This type of millionaire is a millionaire by definition, which is: “Total Assets minus Total Liabilities” = $1 Million

 

Technically, this is true, but keep in mind that this includes your house which can go up or down by 25% or more, depending on the real estate market and the economy at a particular point in time. Over the long term, your house will likely appreciate (go up in value), but a person can attain millionaire status based on their home value, only to have this value dip below millionaire status a month later if the housing market goes down by as little as 5%.

 

There is something else to consider about this definition as well. Most people view being a millionaire as having the ability to spend $1 million or more, or at least to have it accessible. However, as more of your $1 million is due to your home value increasing, this portion of your $1 Million is inaccessible, unless you sell your home.

 

So, unless you are willing to downsize or move to a different city with lower home prices, it can be difficult to access the portion of the $1 million attributed to your home (unless you have 2 homes, such as a cottage and a house, or an investment property and your primary house, however, most people are not in this situation).

 

So, although there are many people who are “technically a millionaire” at some point, most of them cannot make use of this achievement (and may in fact, still live paycheck to paycheck).

 

Level 2: The “Liquid” Millionaire:

This level of millionaire has much more flexibility in having access to the $1 million threshold. I define this version of a millionaire as having “Total Assets (EXCLUDING YOUR PRINCIPAL RESIDENCE) minus Total Liabilities ” = $1 Million.

 

Note: If you have a mortgage on your principal residence, you must include it as a liability, but you cannot include the value of your principal residence as an asset for a level 2 millionaire (since you cannot access this money without selling your house).

 

So, that means that your assets can be in the form of a 2nd residence (cottage or investment property), mutual funds, stocks, bonds, retirement accounts, cash (of course), or any other type of cashable investment.

 

You cannot include items that require a buyer such as jewelery, paintings, furniture, coin collections, or any other material items, mainly because these items are difficult to estimate their value and extremely difficult to liquidate.

 

Also, do not include depreciating assets such as old cars or things such as timeshares (never buy a timeshare, commonly referred to as “time-scares” as they are a money draining asset with little to no resale value).

 

Level 3: The “Pure” Millionaire:

This level of millionaire is the ultimate type of millionaire status to achieve. I define this level as the “After-Tax Liquid” Millionaire.

 

If you achieve this level, you would have at least $1 million available to you if you theoretically cashed in all your investments (I’m not recommending you do this, though, as you should always keep as much of your money invested as possible), and paid all income tax or capital gains tax (profits earned) from these investments owed to the government. After that, if you are left with $1 Million or more, you are a “Pure” Millionaire.

 

In practical terms though, you should never need to spend all your net worth at once, but rather you should use small portions of it as you need it (and leave the rest of it invested so that it can keep earning you money).

 

It is also important to note that there are different taxation rates depending on the asset (bond interest is taxed higher than capital gains on a stock, for example), so you should cash out strategically and only cash out the money you need, at the time that you need it (for retirement, kids college, vacation, or even a new car if you need one).

 

So, how do you know how much to cash out and when? That is a happy problem if you are a pure millionaire, and since the point of this book is to get you there, I will leave the task of “cashing out investments in the most tax efficient way possible” to the experts.

 

I suggest that when the time comes, you spend the money to hire a top tax accountant or financial advisor. Remember, you get what you pay for, so if you hire a cheap accountant, it will cost you more in “potential tax savings” than you saved in accountant fees. The expression “pay me now or pay me later” certainly holds true here.