When we think of someone being rich vs wealthy, it might seem as if the two terms are synonymous, but they’re not. For some reason, the words ‘rich’ and ‘wealthy’ are often incorrectly used to describe the same thing. It’s hard to spot the difference, but being rich and being wealthy is not the same thing.
What does it mean to be rich?
Being rich is simply having a lot of money or income. It comes down to how much cash you have in your bank account. However the fact is that just because you’re rich, doesn’t mean you are wealthy. Actually, being rich can often mean that you are spending a lot of money. It can also mean that you have a lot of debt. It doesn’t matter how much money you have if your expenses are higher than your income.
People who are rich might drive a fancy car or live in an amazing house in the best part of town, but it comes at a cost. If you make $200,000 a year, but spend $225,000 a year in expenses, you might seem rich, but you’re on your way to going broke. In fact, it’s all too typical for celebrities and people of the like to ‘go broke’ because of their rich lifestyles. MC Hammer at one point had $30 million in the bank, a $1 million house with 200 staff members, and a horse stable with 19 racehorses, but all those expenses took a toll on his wallet, and all that spending (along with a number of lawsuits), resulted in Hammer declaring bankruptcy in 1996, landing him with $13 million in debt. Of course, this is an extreme example, but the sentiment is there.
What does it mean to be wealthy?
Being wealthy is not only having enough money to meet your needs but being able to afford not to work if you don’t have to. It’s about amassing assets and making your money work for you. In other words, it’s having a significant net worth, which in turn leads to many things, including wealth for generations to come. Wealthy people don’t necessarily own the latest gadgets or cars or throw lavish parties. What they do have, is a lot of assets, such as real estate, investments, and cash.
Interestingly enough, the most wealthy people in America are often business owners: Jeff Bezos, the founder of Amazon, is worth $145 billion, while Warren Buffet is worth $80.8 billion. Buffet is considered a ‘frugal billionaire,’ as despite his massive wealth, he still lives in the Nebraska home he bought in 1958 for $31,500.
The difference between being rich and wealthy
There is a bit more to being rich versus wealthy than how much money one has in their bank account. In fact, it’s possible for someone who makes less than a rich person to actually be wealthier than the rich person with the fancy car and latest fashion designs. That’s because rich people spend a lot of money, but wealthy people save and invest most of their money. Wealthy people might have a lot of money, but they don’t spend it all in one go. And they certainly don’t use debt unless it’s for a very clear purpose, such as for an investment on a house.
Instead, a wealthy person saves as much money as possible and invests it in assets. That might mean buying real estate or investing in the stock market. Regardless of how they invest, wealthy people know that in order to grow their wealth, they need to turn their cash into assets.
How to become wealthy
If you want to become wealthy, there are a few things you can do to get started. Don’t just focus on how big your paycheck is. Try to avoid schemes that might sell ideas to get rich quickly. Instead, follow these steps to eliminate debt and have the right mindset when it comes to amassing wealth.
Save 10-15% of your paycheck every month. The first step to becoming wealthy is to save a portion of your paycheck every month, no matter how much or how little you make. Always set aside at least 10% to 15% every month. You can set up your bank account so that a portion of your paycheck is deposited directly into your savings. This is an easy way to save without even needing to think about it. If you struggle with saving, try a savings challenge, or look at your budget and find out where you can eliminate expenses. If you’re extra motivated, challenge yourself to increase the amounts quarterly.
Pay off debt, starting with high-interest debt. If you want to be wealthy, you need to be debt-free. Focus on paying off your debt, starting with high-interest loans such as credit card debt. Find out if it makes sense to refinance your student loans or mortgage for a better interest rate. You can also look into things like student debt forgiveness. Make becoming debt-free your number one priority! Invest as soon and as much as you can. One of the quickest ways to work towards growing your wealth is to invest it. Of course, investing comes with its own risks, but there are plenty of options available. You can use an automated service like a robo-advisor, get investment advice from a financial advisor, or invest in things other than the stock market, like physical assets. No matter what you do, do something! You can even put your money in a high-yield savings account to accrue interest until you’re ready to invest it. The key is to make your money work for you.
Don’t splurge on unnecessary expenses. The key to growing wealth is being frugal and living within your means. In fact, you should live far below your means so that you can invest your extra income and savings. That means resisting the urge to buy those designer jeans or buying the latest iPhone model when an older model will work just as well. Be smart about what you spend your money on and only buy the things that you not only need, but that will also last in value.
Think about long-term financial goals and assets. Growing wealth is a long-term commitment. It’s not something that happens overnight. It could take you years to build up your wealth and that’s okay. When things get tough, remember your long-term goals and why you chose to try to become wealthy in the first place.
The bottom line: Wealth is a mindset
Being wealthy doesn’t start with a huge wallet full of cash. Wealth starts with the right mindset. Save a portion of your income, focus on becoming debt-free, and invest early and often. If you want to be wealthy, you need to always think about your long-term goals. Do you want to retire early? Own a few houses? Travel? When thinking about wealth, don’t just focus on your income, but focus on building up your investments and assets to last you lifetimes.
Important Disclosures: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This material was prepared by InVestra Financial Services. Securities offered through LPL Financial, a registered investment advisor and broker-dealer (member FINRA/SIPC). All investing involves risk including loss of principal. No strategy assures success or protects against loss. Investment advice offered through InVestra Financial Services, a registered investment advisor and separate entity from LPL Financial. LPL Financial and InVestra Financial Services do not offer tax or legal services.