Many times, people get confused between the being rich and being wealthy. They do not really think there is a difference between the two. But believe me this is the difference between financially independent or chasing money for the rest of your life.
Being Wealthy vs Being Rich
Being Rich is measured in terms of money. We see people around us driving a fancy car, wearing expensive clothing or going on big vacations every few months. We naturally, probably even rightly assume they are very rich. Rich people could have lots of money but may also have lots of expenses. Maybe they have borrowed a lot of money on credit cards, loans to be able to afford that lifestyle. But the question is how long can they continue doing that? Can they continue driving the best cars, taking expensive vacations or living such a “rich” lifestyle for a long time? Does this sound or look sustainable?
Probably for a few people who have lots and lots of money (think multi-millionaires, billionaires) can sustain rich person’s lifestyle.
But reality is percentage of people with that kind of money is very less. Maybe a few million people in 7.2 billion people on planet can only afford to sustain the Rich person’s lifestyle.
Rest of us can earn lots of money over our lifetime but will still have very little when we get to our retirement. We can live the rich person’s lavish lifestyle and show everyone else that we are rich but how long can that last? Will you be able to afford your current lifestyle during retirement? Or will your standard of living drop once your earning power reduces?
So, what are we to do?
Being Wealthy is something measured in time. It basically allows you to live a sustainable lifestyle over a long period of time. It gives you a sense of security on how long your money can last. It’s not just earning money and just working hard to earn your money. Its more about slowly gaining freedom from your work and indulge more in your hobbies. Spending more time with your family or continue working if you want to, but give you a piece of mind. It allows you to make choices and decisions which you otherwise would not have. Basically, let’s say you spend 1000$/month and you have 10,000$ then you are 10 months wealthy! After that you run out of money.
Being Rich doesn’t necessarily translate to Being Wealthy.
How to become Wealthy? Let’s first look at a few technical terms:
Net Worth: All the money you own in cash/stocks/real estate/other assets – the money you owe like loan payments/mortgage payment/debt/student loans
Essentially, Net Worth = Assets – Liabilities
Having a six-figure salary doesn’t really mean that you are wealthy. You only become wealthy by increasing your net worth. There are many Americans today who earn 6 figure salaries but are considered high earning poor people. When most of us try and figure out our net worth, despite earning 6 figure income most of us realize we have too much debt to pay off, too many monthly payments on phones, cars/mortgage to maintain a certain level of lifestyle. By the time we have done paying off every monthly payment all we have left to put down in assets column is almost close to 0$!
However many a times we do not really know what an asset is and what is a liability. In today’s world, marketing and advertising are so good that people easily fall in trap of buying something and not realize it’s a huge liability and a burden to them financially. So let’s look at how we define assets and liabilities with some examples.
|Something that produces more income for you over time, most of the time passively without you having to do anything!||Reduces the amount of money you have in hand. Keeps drawing off money from your account slowly and slowly|
|Stocks: over the long term (2-3 decades) usually increase in value and are example of assets||Car: every month you pay lots of money to your car company and your insurer to use a car in which you hardly spend more than 2 hrs. a day|
|Multiple houses: One house to live in and other houses to rent out and earn a passive stream of income from.||1 house: Having just one house is a liability until you pay it off. After you pay it off its just a place to stay, doesn’t really bring in any money|
|Savings account that earn interest, retirement accounts etc.||Monthly cable, cellphone bills etc.|
To become wealthy you need to add more assets and try to reduce liabilities. Over time you will notice assets keep increasing your net worth passively allowing you to focus on other issues.