Mike Tyson, MC Hammer, Lindsay Lohan, and most lottery winners all have this one thing in common. They once were rich, and then they went broke. Overcome with spending; they spent more money than they had coming in and eventually they were left with nothing. So, what can we learn from them?
Answer: Being rich doesn’t necessarily equate to being wealthy.
Sure they may sound the same on the surface, but I promise they’re not. Rich Dad, Poor Dad author Robert Kyosaki best describes the difference as “the rich have lots of money, but the wealthy don’t worry about money.”
Understanding the fundamental difference is not as easy as looking at tax-returns. There are few clear cut answers to the differences between the richest people and the wealthiest. However, once you see the difference, you’ll never look at money quite the same. So keep reading to learn more about being rich vs wealthy so that you can set yourself up to reach your money goals successfully regardless of your disposable income.
What does being rich mean?
Typically, when we think about someone as rich, we envision fancy cars, big houses, and yachts that stretch on for miles. We see famous actors, rappers, and elite athletes with $2K shoes, large diamond earrings, and thick gold chains.
And even if we move aside from the superstars, most people would agree that someone making an arbitrary figure greater than $500K is rich. To some of us, someone earning more than $250K is rich. After all, they have fancier cars, bigger houses, and more lavish vacations than most of us in the middle-class.
For the majority of people, being rich is simply about having a lot of money. However, there’s no one figure that economists agree on. Some would say a person who earns $200K a year is rich, and for others, it could be $1 million. The key is these people make a lot of money. They have a certain status about themselves.
Rich people often want people to know they make a lot of money. So, they like to show off by buying things. Hence starts the cycle where they bring in a lot of money, but they spend a lot.
Unfortunately, the spending often exceeds the money brought in, and they find themselves in a lot of debt one day. Their homes, cars, vacations, and more tend to be financed. And most don’t own many of the assets that they appear to have. They end up stuck having to work to stay afloat of their bills. So, if that’s rich, what’s wealthy?
What does being wealthy mean?
Wealth extends beyond differences in income. People with wealth or wealth-building goals for that matter, tend to focus on financial independence rather than dollar signs. Being wealthy is about having enough money and assets to do whatever you want. It’s about having an impressive net worth; one that lets you own your time and live life to the fullest.
Wealthy people have learned to use money. In fact, the vast majority have accumulated assets and make money with money. They’re often business owners and investors. Many will look for passive income to supplement their salaries and build wealth on Wall Street. Their annual income (not necessarily a single salary) can be anywhere from $1 to several millions. They come from middle income, lower income, or higher income families.
Many wealthy people have built wealth with a low-income job or a simple 6-figure salary. They become wealthy with good old money basics like managing debt, living below their means with a budget, and investing in a retirement account. They have built mass fortunes and accumulated a wealth so grand that most can only imagine what that must look like on a bank statement. Yet, what really sets them apart is that they know how to manage their money. If they’re living paycheck to paycheck, it’s because they pay themselves first and invest everything they have after paying their bills and having a little fun.
Wealthy people don’t necessarily show off their wealth. In terms of wealth, their household income could classify them as rich or even super-rich, but they often have a modest lifestyle. Believe it or not…billionaire Warren Buffet still lives in the first house that he bought for a modest $31K. Wealthy people like increasing wealth with an accumulation of financial assets that pay them rather than materialistic things that won’t help them in 5 years.
Fewer than 10% of high-net-worth individuals received an inheritance that propelled them into wealth. Instead, they come from modest households and understand economic inequalities. They see rising inequality and concentrated wealth among the top one-percent and they are working to break the cycle for their family and their communities. Many are working to slash economic inequities and build generational wealth. You may know one; they’re often the millionaire next door.
Can you be rich and wealthy?
As we’ve seen above, being rich vs wealthy is really about perspective. A high-earner is not necessarily wealthy and a wealthy person is not necessarily rich. There’s a significant difference between income and wealth.
Some would say that the wealthy are rich by nature because they have or make a lot of money. But there’s no one way to describe who is rich versus wealthy.
It’s more about a mindset and a culture. In 2021, Generation X and Generation Y are moving beyond status symbols to define levels of wealth. For them, it’s more about building assets and owning their time, being happy.
Some would also consider rich people who can manage their money well to be wealthy. But I like to think that being wealthy is much more than being rich. So maybe we need another term like Mega-Rich.
Being rich is really about a money mindset with no regard for where the money comes from and where it’s going. Being wealthy is an abundance mindset. It’s about being financially free to do whatever you want. Even the Jeff Bezos, Elon Musks, and Oprah Winfrey’s of the world are more than just rich; they’re really, really wealthy.
What are the key differences between being rich vs wealthy?
The rich vs wealthy differ on how they make money and how they spend money. See the chart below for a few key differences:
|Cash flow||Reliant on salary and debt. Not sustainable without a job.||Reliant on multiple revenue streams and investments. Sustainable throughout time.|
|Budget||No budget. Likes showing off and keeping up with the Jones.||Spends less than they bring in, while prioritizing paying themselves first and budgeting.|
|Money philosophy||Live for today||Put your money to work for you.|
A rich person may make $500,000 but live in a $1million dollar house that is financed and $100,000 worth of credit card debt. They’re not wealthy.
A wealthy person may make $50,000 but live in a $250,000 house that is paid off with more than $2.5 million in investments. They’re wealthy and can really do whatever they want.
Are you starting to see the difference? Being wealthy is about so much more than money.
How to Become Wealthy
If you want to become wealthy, there are definitely a few financial guidelines you should follow. These are just a few of the basics when it comes to being rich vs wealthy.
Don’t Carry Debt
This should really say, don’t carry any “bad” debt. Debt associated with depreciating liabilities like credit cards, loans, car payments, etc. should be avoided at all costs. Many people will consider debt associated with appreciating assets (something that will rise in value or generate income) as “good” debt. Bad debt drains your wealth with depreciation and interest. “Good” debt has interest too, but due to the rising value or income generation, it still pays for itself.
Save Money and Have an Emergency Fund
The road to wealth isn’t without its bumps in the road. You’ll need to start saving money and have an emergency fund. Hopefully, you’ll never need to dip into it too much, but having it there will make sure that if the unexpected happens, it doesn’t totally derail all your hard work.
Live Within Your Means
Living within your means simply means don’t spend more than you make. Math says if you spend more than you make, you’ll forever be in debt, and the math ain’t wrong. It sounds like a simple concept, but this is more than just saving some money here, stashing some money away there.
This goes back to the whole mindset that you need to have with your money. Keeping up with the Joneses is likely a phrase you’ve read about sixteen million times in a financial blog, but it’s important. Don’t buy stuff you don’t need to impress others. Fake it until you make it just doesn’t work with finances. Get the right mindset with your money. Buy only what you need, not want, just need. You don’t need a big screen tv, fancy vacation or big car. You need a vacation, sure and yes you need a car, but both can be done at reasonable costs.
Simply put, money in should be greater than money out, no way around it.
Invest Early and Often
Investing is so crucial when it comes to generating wealth. It’s like the opposite of interest. Put $100, get $107 out, like magic. Yes, there are tons of options and it’s not as easy as saying “Abra Kadabra” and poof, you’ve made money. However, if you simply put your money into index funds, mutual funds, and some (maybe 10% of your investments) into stocks, and leave it alone for a decade or two, you’ll certainly have gained a lot of wealth.
Work to Increase Income
You don’t need a big salary to become wealthy, but the higher the income, the easier and faster it gets. More money isn’t just going to get handed to you at most companies. If you are lucky, you might get an annual raise, which more than likely barely keeps up with inflation. You know who gets the big bucks…hard workers. Yup, believe it or not, companies do still notice the ones that put in the extra time and effort. And if they don’t, you work hard to find a place that will. Getting your income up will allow you to live the same lifestyle, but save and invest even more, accelerating you path to being wealthy.
Have Financial Goals
You should really have goals for any aspect of your life, and finances are no different. Make sure you are aiming for something with your money. Maybe you want a million dollars, go for it. Make a plan with the steps you will do to achieve that goal. Once you get there, and you will get there, then set a new goal and make another plan on how you will achieve that. Without goals, most of us will spread our money out too much to have the same impact that it would have if we concentrated it on a specific goal.
So being rich vs wealthy, what have we learned? Sure you can become rich with a high-paying job. However, lots of people spend their life chasing money only to end up feeling dissatisfied when they have it. It’s far more satisfying to build wealth and have the power to do whatever you want. Money isn’t what most people are striving for… it’s just what they think they’re aiming for.
People want time. They want to enjoy life. They want to be present. Wealth requires a mindset built on financial literacy, accumulating assets that make money, and being in a position to give and help others. Wealthy people come from all backgrounds.
While it’s easy to differentiate between rich and poor, it’s far more difficult to differentiate between rich and wealthy. There’s no magical figure that tells us when someone has a specific amount of wealth they’re now considered wealthy.
Being wealthy is less about money and more about financial freedom. Wealth can be built with an average income. It’s a way of life without debts and without worry. It’s about an abundance mindset and having the freedom to decide for yourself if you want to work when you’re 60 years old.
Today we’re in the best position to break the wealth inequality. While you may never be ultra-wealthy like a billionaire, I like to think you could be very wealthy. Millionaires are built by investing in the stock market, maximizing their assets, and limiting their liabilities. Millionaires, who know how to manage their finances, have a level of wealth that no one can take from them.
Wealth isn’t always inherited. And you may find that you’re better off with earned wealth because it takes a certain level of knowledge to keep it once you have it. You can start your journey to wealth with some basic personal finance principles. Set SMART money goals, work on a budget, accumulate assets, and develop an investment strategy today.
So, what do you think? Do you want to have wealth or make a lot of money and live in debt? Comment your thoughts below.