Rich vs Wealthy. Is there a difference? A friend shared with me an anecdote a long time ago.
He said, “Rich people brag about how much they spend, and poor people brag about how much they saved.” I laughed in agreement, thinking he was right.
At that time, I thought being rich and being wealthy meant the same thing. The word “wealthy” was just a fancier word for “rich.” In truth, many people think this way too.
I didn’t care about being rich nor wealthy. I was just pleased to be employed and have a good-paying job. My only financial concern at the time was getting rid of my student debt.
Rich people may brag HOW MUCH they spend, but wealthy people share HOW they save!
Jump ahead to
What does it mean to be rich?
A person’s level of being rich is measured by how much they actively earn at their job. Rich simply means they make a lot of money by working in their full-time job.
For example, a physician that makes $300,000 a year is considered “richer” than a retail employee who makes $22,000 a year.
However, a person who may be rich can still be in debt and can even go broke! Take into account the cost of living, personal debt, and student loan debt a rich person may have, and they may have barely anything left to save!
So, if that’s being rich, then rich people spend money on things beyond their means!
A consumer, regardless of their income status, can buy anything (i.e., lifestyle creep or keeping up with the Joneses). The question is, “Can a person afford it?”
It goes to show that being rich doesn’t necessarily equate to happiness when overwhelmed with debt.
What does it mean to be wealthy?
A person’s wealth is not measured by how much they actively make (i.e., a full-time W2 job). Instead, their wealth is measured by how much time their money can buy them.
A person’s wealth is measured based on how long a person can live off their savings without actively working. For example, a person who can live off their savings for 5-years is wealthier than someone who can live off their savings for one month.
However, living off one’s savings without actively working does have a time limit. That is why wealthy people know to invest in assets, such as real estate, stocks, or royalties, creating passive income.
Their assets provide enough cash flow that they don’t have to work in a full-time job actively. Instead of relying on their savings, the wealthy can live off their passive income without a time limit!
So, which is better: Being rich or wealthy?
Absolute Income vs. Relative Income
Absolute income is a person’s income for a set period (i.e., a year), whereas relative income is a person’s income compared to their peers’ income and per time spent (i.e., per hour).
For example, imagine two people, James and Jayne, each receiving an annual salary. James lives in California and makes $200,000 a year, while Jayne lives in Nebraska and makes $60,000 a year.
Based on their income per year, James’ absolute income is more significant than Jayne’s absolute income.
However, James works 40-hours a week while Jayne works 4-hours a week. Therefore, James’s relative income is about $96 an hour, while Jayne’s relative income is about $288 an hour!
Thus, Jayne makes more per hour than James based on their relative income. Furthermore, Jayne is wealthier because her passive income allows her to have more time!
She doesn’t have to work every day!
5 Steps to Become Wealthy
Create A Budget
Identify where every dollar of your income is going. Before you can build wealth, you need first to understand your current financial situation!
Is it going towards needs, such as rent and utilities.? Or, is it going towards wants, such as eating out and shopping? Also, how much of your income are you saving?
I recommend a zero-based budget to track all your expenses and savings. It gives every dollar a purpose and makes you more confident when it comes to spending.
We have a major expense coming next year that is estimated to cost about $30,000. However, with our budget, we know we can reach that goal.
Reduce Unnecessary Spending
After you can identify where all your income goes, the next step is to reduce unnecessary spending, such as reducing eating out, shipping for new clothes.
Furthermore, relocating to another city or state can vastly reduce your cost of living expenses allowing you to save more!
However, if your necessary expenses are a majority of your income and you can’t reduce your unnecessary spending anymore, then increasing your income is the next solution.
According to Dave Ramsey, you’ll need a “bigger shovel.”
Pay Off Personal and Student Debt
Having any kind of debt can be a weight on anyone’s shoulder. Nowadays, people spend a lot of money on things they don’t need.
I had over $250,000 in consumer and student loan debt. It was surreal when I was finally able to remove that liability from my balance sheet.
List out all your debts, such as credit card debt and student loan debt. Next, order them from the smallest balance to the largest balance, not including your mortgage.
Continue to make the minimum payments to all debts except the smallest balance.
Work towards paying off the debt with the smallest balance by paying more than the minimum payment. After you pay off the smallest debt, use the “extra money” towards the next smallest balance.
I go into this in more detail in my article: 9 Ways to be Fiscally Responsible.
Build An Emergency Fund
Unfortunately, there may come a time when an unfortunate event occurs that can impact you financially. Therefore, it is necessary to build an emergency fund.
I recommend a person save up to three to six months of your monthly needs. Keep this money in a savings account independent of the market.
After you paid off all your debt and have built up your emergency fund, it’s time to start investing! Strive to invest 10 to 15% of your income.
Contribute to your company’s 401k at least up to the company match. That’s FREE money!
Take advantage of a Roth IRA by contributing post-tax dollars. Once you are eligible to withdraw from your IRA, the government can’t tax your money!
Invest in mutual funds and real estate! We go through a brokerage to manage our stocks and own a couple of rental properties in our local real estate market.
With proper discipline and patience, you will be on a path to building wealth! Remember, building wealth is not a “get rich quick” strategy. It takes time to build sustainable wealth.
Our net worth as of July 2020 is over half a million dollars! Also, remember to diversify your portfolio. Concentration builds wealth, while diversification protects wealth.
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