Rich and wealthy, two words that many people use interchangeably but mean vastly different things. Being rich means you have a lot of money coming in, but it does not mean you are wealthy. Being wealthy is not only having enough money to meet your needs but being able to afford not to work if you do not have to. It is about amassing assets and making your money work for you. We will look at the differences between the two, and why people struggle to go from rich to wealthy, in this week’s blog post.
We have all heard the stories of famous people being rich but going bankrupt. MC Hammer, Antoine Walker, Nicholas Cage, and Mike Tyson are just a few of the many. We all wonder how someone could burn through $100,000,000 or more in a lifetime, but their stories aren’t that much different than what I see stopping many other people from being wealthy themselves.
As Antoine Walker said in his interview “I created a very expensive lifestyle. That’s how you lose your wealth, from the beginning,”
The biggest single failure point with money is a reliance on cash flow to fund short-term spending needs with no savings to provide a buffer between what you think your expenses are and what they might be in the future.
If everything you earn goes to paying bills every month the first time the flow is disrupted will lead to problems immediately.
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 does not matter how much money you make if your expenses are higher than your income. Being in debt is not something to aspire to!
People who are rich might drive the nicer car or live in a bigger house in a better neighborhood, but it comes at a cost. If you make $400,000 a year, but spend $425,000 a year in expenses, you might seem rich, but you are on your way to going broke.
It is not hard to spot rich people. They often go out of their way to make themselves known. But wealth is hidden. It is income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
Being swayed by people playing a different game can also throw off how you think you are supposed to spend your money. So much consumer spending, particularly in America, is socially driven: subtly influenced by people you admire and done because you subtly want people to admire you.
This is particularly noticeable in medical professionals just out of residency and business owners who finally turn a decent profit for the first time. They have been subtly influenced to keep up with the Joneses and immediately buy the bigger car and lifestyle as soon as their cash flow allows them.
Why do so many people who are willing to pay the price of cars, houses, watches, and clothes try so hard to avoid paying the price of compounding investment returns?
How should we define wealth?
I view wealth as the ability to wake up in the morning and say, “I can do whatever I want today.”
Morgan Housel said “Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.”
The thing that often goes overlooked is realizing that you do not need a specific reason to save. It is fine to save for a car, or a home, or for retirement. But it is equally important to save for things you can’t possibly predict or even comprehend.
Risk is what is left over after you think you have planned for everything. I can tell you that 15 months ago there were many people that had thought of everything and then a black swan event happens, and people wished they had prepared better for that rainy day.
It does not need to be something so severe as a pandemic for you to benefit from increased savings.
A small amount of wealth means the ability to take a few days off work when your child is sick without it breaking the bank. Some people may take this for granted but is huge if you do not have it.
A little bit more means waiting for the right job to come around after you get laid off, rather than having to take the first one you find. That can be life-changing.
Six months’ emergency expenses mean not being terrified of not putting up with BS at work, because you know you will not be ruined if you must take some time off to find a new job. It also means you may be able to change to a more flexible job and start that side hustle that may one day develop into a business.
More still means the ability to quit your job and starting that business you know would make you happier. Or that the business you are running can make it through lean times easier because you can stop taking money out of it for living expenses.
Wealth means being able to deal with an emergency without the added burden of worrying about how you’ll pay for it.
How do we become wealthy?
- Avoid bad debt like the plague and pay it off if you have it– Credit card interest can be a killer for many Americans. A 25,000 balance at 20% costs an extra $5,000 a year.
- Avoid lifestyle bloat– Do not grow your expenses to meet your income. This is something I suffered from in my 20’s and early 30’s. It did not matter how much I made I figured out how to spend it. Be reasonable and when your pay increases save half and spend half. You will make great progress over the course of years and decades.
- Invest in yourself– Classes, certifications, coaching, skills. We should be on a constant journey of self-improvement. There is no standing still because the world will pass you by if you are not learning something new to bring to the table in your job or with your business.
- Save– Save for the big things like retirement, kids college, and the next house. Also, save just because life happens, and having resources gives you control in how to deal with whatever life throws at you.
- Invest early and often– Investing comes with risks but there is no better way to grow your capital. Invest in the markets, in starting and running a business, or in real estate. No matter what you do, you should do something.
The problem for many of us is that it is easy to find rich people to emulate. They are all over social media trying to get us to buy into the idea that they have the perfect life. It is harder to find wealthy ones because their success is more hidden.
Understand the difference between rich and wealthy and while it might look fun to be rich it’s satisfying to be wealthy.