Did you know that you could be a millionaire and technically, not rich?
The average U.S. millionaire has a net worth of between $2 million and $5 million. But those millions could be tied up in property, assets, and taxes owed.
If you are extremely bad at personal finance, too, inflation could eat your millions faster than if you were just working class.
Barring the elite 1%, just because you have a net worth of $3 million does not mean you have millions of dollars in the bank. Here are three reasons why.
Estate taxes
An estate tax is a federal tax imposed on your decision to transfer properties and assets to beneficiaries after your death.
Unless you have a very competent tax attorney and accountant team, you will pay a lot of money in taxes during your lifetime. The average person with a net worth over $1 million can pay as much as 26% in taxes.
Depending on where you live, the estate tax rate could be anywhere from 18% to 40% of your net worth. Depending on the current state of your finances and debt, an estate tax could potentially negate your status as a millionaire.
In 2022, the exemption limit for estate taxes was just over $12 million. And in 2023, the exemption limit will increase to $12.92 million. It used to be lower and could again be lowered again to $5 million or less.
Inflation
Inflation is the gradual or abrupt decrease in the buying power of the dollar. The thing that you bought a day or a year before could cost a lot more now because of inflation.
And the longer that inflation stays high, or plateaus at a high rate for a long period, the more that your millions will diminish without new or regular income streams.
The current inflation rate is about 6.5% now, but it fluctuated between 7% and 8% throughout 2022. The national inflation rate once reached 9% temporarily.
Look at it like this: 9% of $1 million is $90,000. If you spent $1 million last year but inflation is now 9%, then you would have to spend $1,090,000 now to cover the same amount in a purchase.
If you only have a few million, spend money often, and are bad at budgeting, then inflation could eat your riches quickly.
Net worth and liquid assets
What many people confuse about having millionaire status is that you can be a millionaire based on your net worth, not because you have $1 million in your bank account.
You could technically be a millionaire and only have $50,000 in your bank account.
Net worth is the financial value of all your finances, property, and assets minus the number of debts and liabilities you owe.
You could have a home and land worth $1.5 million and investments and assets worth $450,000 and only $50,000 in various bank accounts. So, you could be a millionaire with a net worth of $2 million, but technically not rich at all.
The real estate market could plummet and devalue your home. Your investments could lose value. And after trying to liquidate anything of value, you could transition from being a millionaire to bankruptcy.
