Do you want to be rich? Or would you prefer to be wealthy instead?
Most people consider rich and wealthy as the same thing. But contrasting them and considering what they mean on a deep level can make a difference in your finances.
In simple terms, being rich is having the ability to spend lavishly due to a high income or sizable financial windfall. But once it’s gone, it’s gone. Wealth, on the other hand, is owning considerable assets that provide long term prosperity. The wealthy do not live in fear of outliving their money, the rich often hold that financial fear.
When you dig a little deeper and ask:
“What does it mean to be rich (or wealthy)?”
“Why would you want to be rich (or wealthy)?”, or
“What would make you feel rich (or wealthy)?”
The answers would be as different as night and day, depending on who you ask. How you define them can have a significant impact on your financial goals.
Rich Versus Wealthy, What Exactly is the Difference?
To get to the heart of the rich versus wealthy differences we talk about here the terms need distinction. Comprehending one from the other is crucial to making your money work for you.
By separating the terms, your understanding of “rich” versus “wealthy” can affect your thinking and behavior toward money.
Knowing the difference can mean more options and choices in your life. Maybe you don’t want to work full-time until you’re 65 or 70 years old. Perhaps you crave more time to spend doing the things you love. Or maybe you imagine starting your own business and being your own boss.
For this article, “rich” means having a substantial income or tremendous inheritance (or winning the lottery, in rare cases). Here we’re defining rich as having enough income to spend on the finest things money can buy, luxuries the average person with an average salary can’t necessarily afford.
The rich can buy expensive cars, big, modern homes, brand name clothing, and epic vacations.
For most of us, being rich means spending money in ways that others can see. (Unfortunately, this is how some people keep score and compare themselves to “rich” people.)
What level of income is rich? $100k, $250k, $500k a year or more?
It all depends on who you ask. (And can be dependant on the cost of living where you reside.)
For our purposes here, “wealthy” means having sustainable wealth that’s not necessarily dependent on a paycheck. Those who are wealthy make, keep and grow their money over time through the ownership of assets.
Assets are investments – in real estate, the stock market, or a business (or many businesses). But when determining wealth, debt needs to be factored into the equation too.
Most financial professionals use net worth as a measure of wealth. Your net worth is your assets minus your liabilities, or what you own minus what you owe.
Assets-Liabilities = Net Worth
But what level of net worth is wealthy? 1M? 5M? 10M?
Once again, it depends on who you ask.
Appearances can be Deceiving: Who’s Rich and Who’s Wealthy?
The rich aren’t necessarily wealthy. And the wealthy don’t always appear to be rich.
When we think of “rich,” we think of the visible signs of money we’re socialized to recognize, like fancy cars, big homes, and designer clothes. But even though the “rich” have a high income, some spend money as fast as it comes in.
In this sense, being rich can be more difficult to maintain. It’s highly dependant on money coming in – usually in the form of a paycheck. And, many times, those who have all the conspicuous signs of being “rich” have substantial debt to support their lifestyle.
“Rich” can disappear as fast as the next paycheck.
But many wealthy people don’t display outward signs of being rich. They may have the money to buy luxury items, but a high percentage of wealthy people don’t own expensive cars, large, modern homes, or designer clothing.
“Stealth wealth” is a term used to describe wealthy people who don’t appear to be rich, but have a high net worth. In this case, the wealthy delay immediate gratification to create long-term financial security.
The Millionaire Next Door is an entire book devoted to research on the characteristics of the wealthy. The authors discovered most wealthy people lived well below their means, didn’t drive fancy cars or live in mansions, and started investing early in life.
The wealthy focus more on growing their wealth and creating more options in their lives – by not spending on the things they don’t value.
The Problem with Being Rich without Being Wealthy
In this case, the critical difference between being rich versus being wealthy is how long the money will last.
The rich are more likely to live paycheck to paycheck. The loss of a job could mean that once the paycheck runs out, that’s it. Without their high income, they could lose everything they own. At the very least, they would have to downgrade their lifestyle drastically.
As you might guess, the rich are more likely to worry about money.
But the wealthy, in essence, create their own streams of income. They invest in assets designed to keep money coming in, even without a job. They have ample savings to get them through significant life changes and have planned for their money to last well into the future. The wealthy are often able to pass their wealth on to the next generation.
Wealth Wins: How to Build Wealth
While being rich sounds like fun sometimes, when defining the terms rich and wealthy in this way, most would agree they’d rather be wealthy than rich. Wealthy offers more – more security, freedom, and options. And less stress to boot.
You can take steps right now to manage your money and start building wealth. The first steps are:
- Spend less than you make. Create a budget and start tracking the money coming in and going out of your life. Lower your spending and/or increase your income to create a gap between what you earn and what you spend. Use it to pay off debt, build up savings, and eventually invest in assets.
- Pay off debt. Pay off your non-mortgage, high-interest debt first.
- Start saving consistently. Build up enough emergency savings to cover unexpected expenses.
Invest in Assets
Once you start living below your means, pay off high-interest debt, and have emergency savings – you can begin building wealth through investing.
You can invest in any number of areas, including real estate, the stock market, a small business, or all the above. It’s a good idea to diversify your assets, so all your eggs aren’t in one basket. Optimize taxes when you can since taxes are one of your biggest expenses.
As you invest in assets, your assets will start growing – and you’ll be on your way to building lasting wealth.
Can you be Both Rich and Wealthy?
The short answer is yes (depending on how you define the terms). And though some desire both, they don’t always go hand in hand.
In the end, the key to being rich and wealthy is to know your values and set your priorities accordingly.
You have to know what you want out of life, and you have to be willing to take steps to get it. Most would agree that building wealth is the way to create a life of financial security, freedom, and satisfaction now and in the future.