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Countless numbers of people aspire to be rich. Whether they want the lavish toys or the appearance of being rich or think that money will make them happy, this is their goal. I, however, aspire to be wealthy. You may be thinking these are the same thing. However, they are not. Today’s post is all about your money mindset. We’re going to explore the differences of being rich vs. wealthy, and why it’s a lot better to be wealthy than rich.
Rich vs. Wealthy: What Does it Mean to be Rich?
To understand the difference between rich vs. wealthy, let’s start with what it means to be rich. The definition of rich is pretty straightforward, because yes, it is likely what you already have in mind.
Rich people are those with high incomes and nice toys. Yes, I am talking about the person that drives the fancy car, goes on expensive vacations, and more.
While I like those things as much as the next person, those luxuries are all costly. Generally, the rich have substantial spending habits to match their incomes.
For many people who are “rich,” their spending outpaces their income. Yes, there are, in fact, many doctors, lawyers, financiers, and others in deep debt, because no matter how much they earn, they find a way to spend even more.
The classic example here is professional athletes. According to CNBC, 60% of NBA players go broke within five years of leaving the league, and 78% of NFL players experience financial distress within two years of leaving the league. Take Allen Iverson, for example. He earned $200,000,000 in the NBA. And then he went broke.
These people all have something in common: they live beyond their means.
My point here is that it’s not about how much you make but how much you save. If you spend more than you earn, despite appearing “rich,” you will be forever poor.
Rich vs. Wealthy: What Does it Mean to be Wealthy?
Next on this comparison of rich vs. wealthy, let’s cover what it means to be wealthy.
Let’s compare the example of pro athletes to that of a teacher. Let’s assume a teacher makes $35,000 per year net. While this isn’t much, suppose that teacher lives well within their means and saves $7,000 per year. That $7,000 is invested at a 7% return starting when the teacher is 25 all the way through when they turn 65. By retirement, that teacher will have amassed nearly $1.4 million and can safely withdraw $56,000 per year in retirement – 2x what they spent during their career.
So, who is wealthier? The NBA player that is in a mountain of debt, or the frugal teacher who now has $1.4 million to spend in retirement?
Being wealthy is less about what you earn and more about what you save. Those who are wealthy spend less than they earn.
Additionally, wealthy people build net worth and develop streams of passive income. They do this by investing. These assets could be stocks, bonds, real estate, or a business. But their goal is to turn their money into more money.
If you’re looking for an exact definition of being wealthy, here’s the best one I’ve heard. Being wealthy is when you can stop working and enough income to cover your expenses.
Being wealthy is about financial freedom. If you build enough wealth, you will have the option of not working if you don’t want to.
What is the Difference Between Being Rich and Being Wealthy?
As I think you can see, wealthy people have different habits and a different mindset about money than the rich.
Rich people spend, sometimes more than they earn, while wealthy people save and invest.
Rich people buy toys – boats, cars, first-class airfare, you name it. Wealthy people buy assets – things that produce more money.
When it comes to knowing if a person is rich or wealthy, looks can be deceiving. Just because someone has a nice car or a beautiful house doesn’t mean they are wealthy. The wealthy are often the ones living in a modest house and driving run-of-the-mill vehicles.
There’s a great book on the topic of what the wealthy look like, and it’s called The Millionaire Next Door. I encourage you to check it out if you want to understand the habits of the wealthy better.
It is possible to be rich and wealthy. However, there is a crucial difference.
Rich people use money from their regular income to spend. Wealthy people invest first and then spend using money from their investments.
Imagine someone wants to buy a fancy new German car that costs $50,000. The rich person will go to the dealer, plop down a few thousand bucks, finance the rest, and then have a $750/month car payment. A wealthy person will take that same down payment, invest it and more, and then wait until they have enough income to pay for that car in cash.
It is possible to have the luxuries in life, but only if you do things in this order. Invest first, then let your investments pay for the things you want through the passive income they create.
Rich vs. Wealthy: How to Become Wealthy
Unfortunately, the road to wealth is a long one. There are no shortcuts to becoming wealthy, but if you act with consistency, eventually you will have income-producing assets to your name.
If you’re looking for a step-by-step guide to becoming wealthy, candidly, the steps aren’t too difficult. What is difficult, however, is having the willpower to follow through on these steps day in and day out.
The steps to becoming wealthy are as follows:
1. Lower Your Expenses
If you want to become wealthy, the first step is to reduce your expenses. The easiest way to do this is by budgeting so that you know where your money is going. I recommend the app You Need a Budget for this purpose.
I am not saying you need to live in a hut and eat rice and beans, but you should adjust your spending so that you can consistently put money away each month. Aim to put 20% of your income towards your financial goals.
Also, if you’re looking for a dead-simple way to cut your common expenses like cable, internet, home security, and your cell phone bill, check out Truebill.
2. Ruthlessly Pay Off Debt
If you have high-interest rate debt, be it credit cards or something else, pay it off as quickly as you can. You will never become wealthy if you have high-interest rate debt.
Some low-interest-rate debt such as a mortgage is generally okay, so long as it is not so expensive that it is eating a big chunk of your income. If your housing is expensive relative to your income, this is a concept called being house poor.
I know about being house poor, because I have been in this position – my income was eating over half my take-home pay. Trust me. It’s not very fun. If you find yourself in this position, see if you can reduce your housing costs on a longer-term basis (i.e., moving to a cheaper house or apartment).
3. Save & Invest
Once you’ve paid off high-interest rate debt, work to save and invest as aggressively as possible. 20% of your income is a great target, but obviously, the more you can save, the faster you will work towards your financial goals.
As you’re thinking about buying assets, some potential asset classes include stocks, bonds, real estate, alternatives (such as peer-to-peer lending), and more. While there isn’t just one exact formula, the key is getting started.
How Much Money Do You Need to be Wealthy?
One common question is how much it takes to become wealthy. Unfortunately, there is no universal answer to this question. Let’s look at an example.
Hypothetically, assume your expenses are around $4,000/month. Suppose you’ve amassed $600,000 in assets. If those $600,000 in assets produce a 3% dividend, that’s about $1,500/month in income. At this point, you now have a shortfall of around $2,500/month ($4,000/mo. in expenses and $1,500/month in passive income). You are not yet wealthy.
To be wealthy, in this scenario, you’d need about $1,600,000 in assets to produce $4,000/month in income (assuming a 3% return in passive income). Now, of course, in retirement, you are likely to draw down on the principal as well. But by my definition of wealth, you should try to build an income that will cover your expenses without drawing down the principal.
Of course, if your expenses are less, it takes less to become wealthy, and if your expenses are more, it takes more to become wealthy. Hopefully, by now, you are noticing a theme – lowering your expenses is a key to wealth.
Looking to learn more wealthy habits? Check out the 17 habits to build wealth!
How do I Plan to Become Wealthy?
I, too, am on this journey with you to wealth creation. While I do have a long way to go, but I have a plan to get there. I want to share with you my plan for wealth creation with the hopes that it inspires you to get started yourself.
1. I Track My Spending
First, I track my spending using YNAB, and I keep an extremely close eye on my budget. I am not perfect by any means – I have times I overspend on things I shouldn’t. But budgeting has brought more discipline to my financial life than anything else. Since I started using YNAB, I have successfully cut my spending by more than $1,500/mo.
2. I Save & Invest Aggressively Using Tax-Advantaged Accounts
There are lots of deterrents on the road to building wealth, one of which is taxes. To assist with this issue, I do my best to max out all available tax advantages at my disposal.
In particular, I aim to max out my 401(k) at work and my IRA as well. As of 2021, this means I can invest $25,500 per year in tax-advantaged money.
I use these accounts to invest in stocks and bonds, with a substantial weighting towards stocks based on my age and risk tolerance.
If you don’t yet have an IRA, set one up at M1 Finance.
3. I Invest in Real Estate
At this time, I currently invest in real estate passively through publicly available REITs as well as an investing platform called Fundrise.
The next step for me on this journey is to invest in rental properties directly. Real estate has excellent tax benefits, and that’s one reason it is something I am actively pursuing.
4. I Work to Develop Additional Streams of Income
While I do have a stable job in financial services, I am looking for ways to develop additional streams of income. Any other streams of income I can generate will further fund my investing goals.
Examples include this blog, and in the future, real estate.
5. I Track My Investments
Finally, I keep close tabs on my investments, as it’s rewarding to watch them grow. I want to know where my money is, how my investments are performing, etc. The tool I recommend for this is Personal Capital. You can read our full review here.
The Book that Changed My Life
Finally, I want to briefly mention the book that inspired me to write this post.
The book Rich Dad Poor Dad was recently recommended to me, and I have to say, it is perhaps the best book I have ever read. While countless books walk you through the mechanics of saving and investing, this book is about your mindset. It covers in detail the rich vs. wealthy and how you can set yourself up to be wealthy.
Robert Kiyosaki writes in a way that is so easy to understand, and the concepts in this book lit a fire under me to work towards building wealth. I cannot speak more highly of the book.
You can check out Rich Dad Poor Dad on Amazon.
Rich vs. Wealthy: All about Mindset
The rich and wealthy have different mindsets. If you want to build wealth successfully, you first need to get your mindset right.
Once you do, work towards spending less than you earn, and buying assets that produce income. The more assets you have, the closer you’ll be to financial independence and real wealth.
It is easy to be rich – spending more than you earn on the luxuries in life. The steps and the necessary willpower to build wealth are much more difficult. But if you do it successfully, you’ll be well on your way to building wealth.
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