“This post may contain affiliate links. Please read my disclosure for more info.
The terms rich vs wealthy are used interchangeably a lot, but there’s a world of difference. Someone can be rich and wealthy, but a rich person isn’t necessarily wealthy.
It’s easy to confuse rich vs wealthy because lots of rich people surround themselves with signs of wealth – big homes, new cars and a lifestyle that’d be hard to pass up..
On the other hand, many wealthy people live so conservatively that you’d never know they could afford to hop on a plane to Bali for the next month on the spur of the moment.
So if being rich and being wealthy are not the same thing, what are the differences?
What does it mean to be rich ?
Someone who appears to be rich has a high income that enables them to live an extravagant lifestyle. But having a high income, or being rich, doesn’t account for other factors that would enable he/she to maintain that lifestyle:
- They may be heavily in debt, with much of their income spent to maintain their lifestyle.
- Spending a majority of their income on debt payments, means they’re not able to invest money for the future.
- If something happens to interrupt their income, like a job loss, their lifestyle could decrease dramatically very quickly.
Mike Tyson became very rich over the course of his boxing career, earning over $300 million dollars. He lived in a 21 bedroom home, could walk out to his driveway and choose between a Lamborghini, a Ferrari or a Rolls Royce, and even kept a pet tiger. But like any athlete, big salaries don’t last. Eventually, he filed for bankruptcy, declaring debt of $23 million dollars.
It may be hard for you and I to relate to someone who lived in a home bigger than the White House, but there’s no doubt, we encounter rich people every day.
It could be your neighbor with the beautiful home and the new $60,000 SUV. Their life sure looks comfortable, but if most of their income goes to support their lifestyle now, and not on assets that appreciate in value, they may be rich but they’re certainly not wealthy.
What does it mean to be wealthy?
Being wealthy means not only having the income to live a good life now, but having investments, built over time, that produce enough income that you no longer need to exchange hours for pay.
Becoming wealthy means you can work, but you don’t need to, because you’ve invested in assets that produce enough income to support yourself.
It can be hard to recognize a wealthy person, even when they live next door. Because rather than spending money on new cars and expensive clothes, they probably direct more of their income to things that grow in value like stocks, mutual funds, real estate and retirement accounts.
A wealthy person may lead a lower consumption life than a rich person, but by systematically saving, they may walk away from work years, maybe even decades, before a high-income, “rich” person could. Slowly and methodically, they’re buying what we all want – freedom.
The difference between being rich and being wealthy
Being rich has more to do with having money in your pocket now, and the ability to live a lifestyle that other people might envy. But it doesn’t address your long-term security.
Being wealthy is about having the freedom to do what you want today, or any day. A wealthy person has earned the ability to choose their lifestyle by consistently investing their income in assets that appreciate. Until one day, they’re able to live off the income those assets produce.
It’s easy to mistake a rich person from a wealthy person, even on your own street.
One neighbor may have the nicest home home on the block, and spend every weekend on their boat. Another neighbor lives in a modest home, drives an eight year old Honda, and they’re perfectly satisfied with low-cost or free activities on the weekend.
So who is more well off?
- What if your rich neighbor with the luxury SUV and the boat were laid off next week?
- How long could they live off their emergency fund or other savings?
- Are they up to their eyeballs in debt to pay for their lifestyle?
- And has all that debt prevented them from building savings and investments?
There’s an element of time when you consider the difference between being rich, and being wealthy. Specifically, how much time could you maintain your current lifestyle if you were to stop working today?
Being rich means having enough money to live comfortably now, but not forever if you stopped working. Being wealthy means living comfortably now, and having the choice to stop working today and maintain your current lifestyle indefinitely. .
How to Become Wealthy
Becoming wealthy is different than becoming rich. An athlete can become rich overnight by signing a huge contract. But according to Sports Illustrated, 78% of retired NFL players file for bankruptcy within two years of retirement.
Or closer to home, you might consider your friend who just landed a six-figure job “rich”.
Becoming wealthy is more about the consistent process of handling your income, regardless of your salary. It’s about paying yourself first, through saving and investing, and then living on what’s left. You become wealthy by prioritizing long-term security over the “I want it now” mindset.
There are dozens of ways to build wealth through investments, but there are a handful of habits that almost anyone uses to become wealthy:
1. Use a budget
Whether you wear jeans to work or a three-piece suit, knowing how much is coming in each month and where it’s going is the first step. You’ve gotta know the details.
Budgeting is a chore that many people cringe at, but it’s the only tool that’ll help to increase the gap between what you earn, and what you spend. It may take several months to feel comfortable budgeting, but that’s ok. The long-term benefits will far outweigh the few months it takes to get your own system down.
2. Pay yourself first with every paycheck
Most people prioritize bill paying with every paycheck. But that could be why almost 80% of Americans live paycheck to paycheck their entire life.
Building wealth means paying yourself first through saving and investing, and then paying everyone else.
If your budget shows there’s not enough money to pay yourself the first 15-20% of every paycheck, that’s not necessarily a bad thing. That’s exactly what a budget is supposed to do.
Your budget is a tool that’ll help you to be intentional with your paycheck. It’ll show you which areas you can target in order to get to a point where you can pay yourself first.
Things like credit card debt, food spending, entertainment, car payments, insurance and even your rent or mortgage are all likely high expense items that could be lowered.
Building wealth is a process, so even if it takes a few years to get into the position where you can pay yourself first, you’ve accomplished a lot! You’ve now shifted your trajectory from paycheck to paycheck to a gradual upward trend.
3. Eliminate consumer debt (including car payments)
Building wealth is about accumulating assets that appreciate in value. But when a big chunk of your paycheck goes to debt payments, you’re paying a huge opportunity cost. You’re not only unable to invest that money, but you’re losing the time that compound interest could be multiplying your money.
Even an auto loan at zero-percent interest isn’t a wise investment because the car depreciates by 20% the minute you drive it home, and another 10-15% each year. And the 4 or 5 years of payments is money that could have been spent on appreciating assets.
In this post about Saving Money on a Low Income, I go over an easy, more cost effective way to buy a decent car and still have money to invest.
4. Track your net worth, but also your investment income
Your net worth is the most accurate way to know whether your overall finances are on an upward or downward trajectory. Net worth is just the combined value of everything you own (your assets) minus the value of everything you owe (your liabilities).
Two of these monthly budget templates have simple net worth calculators included.
But to become wealthy, you’ll also want to know how much money your investments produce each month. Because the point at which you become wealthy, is when your investments produce more than your monthly expenses. That’s when you no longer need to exchange your hours for pay.
An easy way to track your investments is with Personal Capital. It’s a free app that’ll give a run-down of all your investments and accounts on one screen, or individually.
Personal Capital does offer paid financial advisors, but that’s optional. Their basic, free app is surprisingly full-featured, and will do things like savings projections and recommend age-based investment allocations. It’ll even let you know whether your investment fees are above or below average.
Related: Personal Capital Review
5. Consider your longer-term goals
Michael Hyatt talked about why you need to have a plan for your life:
“A life plan will help you clarify your most important priorities. Your boss has a set of priorities for you. So does your spouse. Perhaps others do, too. But what about you? Do you have a list? What is important to you?”
He was talking about living your life with as few regrets as possible. But since money is a factor in almost anything we want to do in life, it’s important to decide on one or two main goals.
Your plan doesn’t need to be complicated. It’s probably less than a page. It’s just a description of what you want to accomplish within the next couple years. Maybe this year your focus is to finish school, or save for a new home. In a few years it’ll be something different. But actually writing down your priorities can help you to shake the “I want it now” mindset and focus longer term.
6. Consistency and time are keys to building wealth
Building wealth isn’t just a matter of earning lots of money. It’s more about developing a consistent process of investing in assets that appreciate, and taking advantage of what Albert Einstein called the eighth wonder of the world – compound interest.
For every year your income is swallowed up by debt and spending, your ability to accumulate enough wealth to stop working is lowered.
These six steps will help, but If your budget shows you’re not able to pay yourself first, you can take other steps to decrease the time it takes to get to that point:
- There’s no shame in picking up a side hustle like delivering food in order to eliminate debt.
- Or re-evaluating your lifestyle and taking a few temporary steps back.
- Questioning every expense to find lower cost options that deliver the same value.
- Or asking for a raise if you feel one is due.
The difference between rich and wealthy is your choice
The idea of a wealthy life boils down to having what you need, and waking up every day with the choice to do what you want.
Whether you work as plumber, or a Wall Street executive, your ultimate goal is probably the same – the freedom to one day, walk away from work and do what you want.
So the question is, what do you need to live a satisfying life, and how much does it cost each month?
The Wall Street executive may be rich quicker than the plumber, but the great thing about building wealth, is that it involves lifestyle and behavior over time, and not just income.
So the plumber could feasibly be sitting on a beach every day, while the executive is still sitting on a train.
How about you? Have you been able to start increasing the gap between what you earn and what you spend?