09/12/2014 08:14 pm ET Updated Nov 12, 2014

What Wealth Isn't

How do you define wealth?

Perhaps one reason so many Americans find it difficult to build wealth these days is that they are aiming at the wrong target. They get lured by decoys -- things that might seem like wealth, but in the end do not have its true staying power.

False indicators

The following are some examples of those decoys -- five things that wealth is not:

  1. Your credit limit. This can be thought of as the standard-of-living trap. People see wealth as a lifestyle, involving a certain level of quality or even luxury in their cars, clothes, residence and furnishing. However, if you are relying on credit to finance your lifestyle, you are actually moving backward rather than forward. Every possession you buy with credit is offset by the amount you owe -- your assets are negated by your financial liabilities. Worse, most of the things you have bought are probably depreciating in value, while the amount you owe money grows by incurring interest. Americans currently have more than $3 trillion in consumer credit outstanding, meaning there are a great many people going backward in wealth when they think they are moving forward.
  2. Your portfolio's high water mark. An investment portfolio is going to have its ups and downs, but people get too carried away by the ups. They reset their expectations using the latest high water mark as an assumed starting point toward greater wealth, without recognizing they are bound to take a step back at some point. The stock market has had quite a run over the past five years, so you might be wise to allow for a setback in any return assumptions you build into your savings plan.
  3. Your wages. Your earnings are a means toward building wealth, but it is not actual wealth because the future is always uncertain. You may be earning a good income now, but your lifestyle would suffer if you had to take a lower salary in the future. This is why saving is so important -- it builds you a cushion to give your lifestyle some staying power against career setbacks.
  4. A retirement projection. Using a retirement calculator or other means of projecting how your retirement nest egg will grow is an important part of retirement planning, but don't mistake crunching the numbers with assuring the outcome. Long-term projections rely on a number of assumptions, and over time you are going to have to continually adjust to instances where reality differs from those assumptions.
  5. Interest income. The unreliability of interest rates has been illustrated dramatically in recent years, and this has sharply reduced the earning power of people's savings. Yet another reason why building wealth is so hard is that you can be very conservative with your money and still find yourself exposed to some form of risk, like seeing the interest on your savings accounts all but disappear.

In the end, wealth is elusive because it is a moving target. True wealth has staying power, and yet portfolio values, interest rates, career plans, expenses and other variables are all changing constantly. That does not mean that aiming for wealth is hopeless, but it is a constant series of adjustments. As long as you keep adapting, you should find yourself getting closer and closer to the target.

More from Richard Barrington:

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