Sunday, May 20, 2012

Rich Vs. Wealthy - An Explanation of the Difference Between Rich Vs. Wealthy

Over the last several months I’ve noticed quite a lot of chatter on the internet regarding the “differences” between being RICH vs. WEALTHY so I thought I’d weigh in with a few thoughts of my own especially since I promote wealth building not building riches.

For the purposes of this article we will not be talking about emotional or spiritual wealth, though they are certainly important. Those are entirely different topics and warrant their own discussion.

So do you want to be rich or wealthy and is there really a difference? I must preference this discussion by stating that it is certainly better to be either of them than neither of them. With that said, we will first want to get a rough idea of what the two definitions mean so let’s pull out the old dictionary. “The Lexicon Webster Dictionary” defines “rich” as having abundant material possessions; well supplied; abounding; producing abundantly; productive; wealthy.

Well that didn’t really clarify the definition for me so let’s look up “wealthy”. The same dictionary defines “wealthy” as having wealth; affluent; opulent; ample; material possessions in all their variety; “a collective term for riches.” It appears that Mr. Webster didn’t have a firm grasp on the differences either.

OK, I guess the differences are in the “eye of the beholder” so to speak. So let’s try to define them ourselves. First think about being rich. Imagine that you wake up tomorrow, your wish was granted and you are now among the “newly rich”. What images immediately come to mind? Next take just a moment to jot down what being rich would mean to you. Would it mean a new car, bigger house, a boat, long vacations?

Now repeat these two steps but this time your genie was very good to you and “poof” now you wake up “wealthy”. Did you upgrade your list of material things? This time instead of thinking about a new car were you imaging a Ferrari, Bentley or Lamborghini? And the bigger house is now a mansion and the vacations are now on your yacht aren’t they?

Sustaining your riches makes you wealthy.

Now comes the most important question, the one that I believe really distinguishes the rich from wealthy. Was your wealth sustainable? Did you still see yourself on that yacht in your “golden” years? Wealth is sustainable. Wealth can endure for generations. Rather than working for their money wealthy people know how to make their money work for them.

Being Rich is a very good thing but when you stop working for the money you will eventually run out of it unless you have studied the “science” of making your money work for you. With the right investments your money can work for you 24 hours a day, 7 days per week. When you learn to make your money work harder for you than you work for it, you will be well on your way to becoming wealthy.

The Invest To Retire website promotes your wealth building education rather than an education in building riches. Riches can often be fleeting. As a familiar example, it is widely reported that 7 out of 10 lottery winners are bankrupt within a few short years after they win. Remember that all 10 were “rich” but 70% didn’t know how to stay that way. They didn’t understand or perhaps even care to learn how to turn their riches into long term wealth.

Let’s assume that the day before you woke up “rich” you were within the average of American households earning a salary of around $43,000 annually. Chances are that you may consider a $1,000,000 lottery jackpot as being rich. Would you quit your job?

In order to maintain your current average income of $43,000 per year, your $1 million jackpot would be depleted in 23 years. Remember, a majority of lottery winners are flat broke within a few years after winning. Assuming you did not change your lifestyle or spending habits, you’d have 23 years of “income” at the same level you’re used to.

Twenty three years may seem like a long time, but if you hit the jackpot in your early twenties, you’ll be out of money by age 50. Still thinking of quitting your job? Probably not.

So, what does it take to maintain the same $43,000 per year, allow you to quit your job, and still be able to keep $1 million for posterity? The simple answer is investing your windfall and earning compound interest on your investments. A modest 4.3% will keep you at your current income level (before taxes), allow you to quit your job and be able to maintain $1 million. The most important thing to remember is that the $1 million drives your interest earnings and you’ll never want to tap into that principal.

But, who wins the lottery and just wants to maintain their current lifestyle? I’m willing to bet its not you.

If you want to double your current income, quit your job and maintain that $1 million, you’ll have to earn a consistent 9% on your principal. Again, the difference between being rich and wealthy is sustainability. Without sustaining your principal, you’ll be rich but not wealthy and your riches will surely deplete to nothing.

Odds are that you won’t win the lottery or even inherit a large sum of money. No worries, though, you can still amass wealth starting with what you currently have.

Just like when you were a baby you had to crawl before you could walk, the same is true with investing. You will need to educate yourself about the basics of making investments that produce safe, secure, consistent returns, making your investments work for you. Remember the proverb: “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime”. Nowhere does this hold truer than with building your wealth.

Even if you are not currently a high income earner you can become rich in a relatively short time if you actually implement investing strategies that produce high and consistent returns on your investments. And if you learn to mange your investments to make them work for you, you will be on your way to becoming wealthy.

Being rich is a function of how much you earn. Don’t confuse being rich with earning a high income but at the same time drowning in debt. Becoming rich requires the knowledge to make money or in some cases luck. Becoming wealthy requires the knowledge to use that money to make even more.

Recently I heard a straight forward definition of rich vs. wealthy that I like. It was defined as “a pro athlete is rich and the guy that signs his check (team owner) is wealthy”. I sort of think of Wealthy as Rich on steroids.

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