Did you know that there is a difference between rich vs wealthy? Knowing the difference is crucial in your road to building wealth for the long term.
Whenever we talk about someone as rich or wealthy, we assume that being rich or wealthy is the same thing, but that is not true. The two words may be used as synonyms, but they have different connotations.
It may be hard to know the difference right now. Learn the difference between being rich and wealthy and why one of these is not a good thing.
What Does Being Rich Mean?
Being rich is earning a lot of money or having a high income. It boils down to how much cash you get in your bank account every month. When we mean rich, what pops up in your head are super-rich people like celebrities or actors, people that earn a lot of money.
Besides that, other rich people are doctors, lawyers, or others with high-income skills that earn a multi-six figures income.
Rich people show that they make a lot of money. They may own a high-end car or live in a big house in the best (and most expensive) area in town, but all of this has a cost involved. There are no free lunches in this world, and if you earn $250,000 a year but spend all of it, you might feel that you are rich, but you are well set on the way to getting poor soon.
They are seen as rich and successful in this economy, but they are not wealthy. The richest people can be the poorest when they need their incomes to keep up with their lifestyle.
Bear in mind, just because someone is a lot of money, it doesn’t guarantee that they become wealthy.
What Does Being Wealthy Mean?
Being wealthy is measured by how many assets someone has often shown in a net worth number.
As Robert Kiyosaki stated in Rich Dad Poor Dad, assets are things that put money in your pocket. You are building and buying assets to sustain old money or make new money for yourself. It’s essentially creating your own money-making machine, where you invest money in it, and money comes out at the other side.
It’s harder to see if someone is wealthy because you can’t always see how many assets someone has. These assets are expressed in your net worth, which is a sum of everything you own and everything you owe. If you want to know how much money you have when you sell everything right now, you’re talking about your liquid net worth.
If someone is wealthy, they aren’t always displaying it by buying expensive cars and fancy vacations. Some people are rich and wealthy, people who get so much more money in than that is going out that they are building wealth and spending a lot.
Many people have stealth wealth, meaning that an average person with an average salary can be financially independent and retire early. For example, I started investing my first dollar when I was earning $26,000, and I’m on my way to be financially free in 5 years.
The majority of the wealthiest people in the United States aren’t even millionaires. They are affluent billionaires that are very wealthy. They become wealthy through their own business or are self-made. They don’t need to spend money to look rich. Instead, they do philanthropy and want to reduce income inequality.
For instance, Bill Gates, co-founder of Microsoft, has a net worth of $133 billion. Besides, the net worth of Grant Cardone also points to him being a billionaire, at $2.6 billion.
Similarly, Warren Buffet is worth $85 billion. Warren Buffet is famous for his frugal lifestyle. Despite his colossal wealth, Buffet still resides in the Nebraska residence he got in 1958 for $31,500. When he got a beach house in California for vacationing by paying $150,000 in 1971, he sold it off for $7.5 million.
TL;DR being wealthy is all about making your money work for you.
The Difference Between People Being Rich vs. Being Wealthy
There is a lot more to the difference between rich and wealthy than the amount of money you have saved up in your bank account. It is possible for a person who earns less to be wealthier than a rich person with a fancy car and expensive clothes.
Well, how is that possible?
The difference between rich vs wealthy people is that rich people tend to spend the bulk of their money. On the other hand, wealthy people save and invest the majority of their money.
Wealthy people may or may not have a lot of money, but they do not spend all of it. Wealthy people also don’t rely on debt unless investing in a long-term asset, like a house or real estate investment.
Wealthy people save as much of their income as they can and invest it in assets. The investment might be buying real estate, investing in the stock market, investing in peer-to-peer lending, or other things that generate passive income. No matter how they invest, wealthy people know that assets are necessary to increase their wealth.
How to Become Wealthy & Rich
Luckily for you, wealthy and rich aren’t mutually exclusive. You can be both rich and wealthy.
There are several things you can start to do to get set for some long-term financial health. Start following the steps given below to increase your net worth. Stop focusing on how large your paycheck is, and develop a healthy mindset towards building wealth.
1. Save up 15% of your paycheck
The first rule to build up wealth is to save a fixed portion of your paycheck every month, no matter what the size of your salary is. Always put 15% (at the very least) aside every month.
To do this without fail, you can set your bank account to automatically put a preset portion of your income straight into your savings account. Pay yourself first. Automating some part of your savings is a sure-fire way to save some money without even having to make any effort.
If you have a problem with saving money, take up a money savings challenge, make a monthly budget and find out areas where you can cut down on expenses.
2. Pay off your debt
If you want to be wealthy, you have to be free from all high interest-rate debt. Keep a focus on paying off all your expensive debt. Start with high-interest loans such as credit card debt or car loans.
Explore all avenues to see if it makes financial sense to have all your student loans or mortgage refinanced for a lower interest rate. You should also look into options like student debt forgiveness. Make it a priority goal to become debt-free.
When you pay off your debt, you will pay less on interest every month. Those recurring monthly debt payments free up money you can put toward other short-term financial goals.
3. Invest As Soon As You Can
One of the most foolproof ways to grow your wealth is to invest it. Be sure to have your emergency fund fully funded before you start investing. Put your emergency fund in a high-yield savings account to access it only when you need it.
While investing has its own set of risks, there are many possibilities. Investing in the stock market would be an excellent place to start, especially low-cost index funds.
Just make sure your money is working for you.
4. Don’t Splurge On Unnecessary Expenses
The key to becoming wealthy is to be mindful of your expenses and live below your means. As a matter of practice, you should live as far below your means as possible to invest all your saved income.
Doing this will involve resisting the compulsion to buy those branded jeans or buy the new iPhone model, especially when an older model works just fine. Make it a point to rethink what you spend your money on.
Practice buying just the things you need or really really want.
I believe that you can spend on what you want, as long as you cut back on the things you don’t value. I don’t love going out to eat, so I rarely do. I value traveling, so I spend four months traveling around the world in 2019 and spent thousands of dollars. Here are the things I stopped buying to fund that.
5. Identify long-term financial goals and assets for yourself
There is a common perception that only people with money have to invest their money. What we need to recognize is that the wealthy become wealthy because they invest.
Increasing your wealth is a pledge that is going to be a lifelong commitment. Wealth is not something that appears overnight in your account magically. It will take you some time (and a lot of practice and focus) to build up your wealth, and it’s all right.
When things get tough financially, keep revisiting your long-term goals and recall why you decided to try to build your wealth in the first place.
Sit back and watch your investments grow over time.
Develop A Wealthy Mindset
You don’t start being wealthy with an account full of cash. Wealth starts to build up with the appropriate mindset. Save a fixed portion of your earnings, make it a point to invest as early and as often as possible. Make investing a part of earning. As long as you get a paycheck, you should make sure to invest some part of it.
Over the long run, you need to invest intelligently to build upon your existing wealth. Do extensive research, keep an eye on your investment area, and keep up to date with the latest developments. If you are not relaxed about investing in a particular option, don’t do it. Look for other options.
There are a couple of ways you can develop a wealthy mindset:
- Repeat affirmations for wealth and abundance
- Quitting caffeine
- Save 15% of your income
- Create an investing plan and stick to it
All In All – Rich vs Wealthy
If you want to choose between rich vs wealthy, go for wealthy.
If you’re rich, you focus on spending money right now without thinking about later.
If you’re wealthy, you focus on spending money only on what you value so you can live comfortably later.
When you want to become wealthy, you can follow these simple steps:
- Save up 15% of your paycheck
- Pay off your debt
- Invest as soon as possible
- Don’t splurge on unnecessary expenses
- Find your long-term financial goals, your why
What do you want to be, rich or wealthy?
This article is published and syndicated by Radical FIRE.
Marjolein is a financial consultant who has built over €4,000 monthly passive income and saves over 70% of her income. Read Radicals’ inspiring story, from stuck in the 9-to-5 to loving life. Feel free to send Radical a message at the bottom of this page