Being Rich vs. Being Wealthy: Learn Which One Can Land You in the Poor House

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The difference between being rich versus wealthy has become more difficult to discern, but the terms actually differ in meaning. The main difference between a rich person and a wealthy person is in how sustainable their wealth is. While the rich person might only have their money for a short period, the wealthy person has amassed enough assets that they no longer have to worry about money.

Getting rich without ever becoming wealthy is all too common. For example, studies have shown that one way to quick riches — winning the lottery — tends to delay rather than prevent bankruptcies. Lottery winners also tend to have similar asset and unsecured debt levels as non-winners.

It stands to reason that those who build wealth want to avoid such pitfalls. Fortunately, you don’t have to fall into this trap just because you increase your net worth. By learning more about the difference between rich and wealthy, you can learn to build assets that are not only adequate to make you financially free, but that also last beyond your lifetime.

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What Does It Mean To Be Rich?

What constitutes “rich” can differ from person to person. A person in Burundi, where average per capita income amounts to $700 per year, might consider someone with $2,000 in the bank to be rich. But $2,000 might barely cover one month of rent for someone in San Diego County, where rents average $1,852 per month.

High Income

Although the rich tend to benefit from high incomes, this shows the fleeting status of “rich.” Take NFL players, who earned $2.7 million per year on average in the 2017 season and made no less than $480,000 per year. Should they lose their ability to compete, most lack the skills to match that salary in another profession. This could make their “riches” tenuous.

The Real Cost of Spending

Spending sprees can make money evaporate as quickly as losing a fat paycheck — a lesson that lottery winners and other windfall recipients often learn the hard way. The influx of money can make them feel richer than they are, according to Vermillion Financial Advisors, Inc. The result is financial mismanagement and destructive spending habits that churn through money these individuals are unable to replace.

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That’s not to say the struggling rich are always reckless spenders. Those whose earnings take off due to job promotions or business success often upgrade their lifestyles gradually, as their bank balances increase. But the outward trappings of their success, like a larger home and private school for the kids, can leave them scrambling to maintain their new lifestyle. From a financial standpoint, they’re no better off than they were with lower earnings despite their elevated status.

Avoid Becoming a Victim to This Financial Pitfall: Lifestyle Creep

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What Does It Mean To Be Wealthy?

Wealth refers to around income-generating assets rather than the money itself. A Charles Schwab survey found that Americans need to accumulate $2.4 million to identify themselves as “wealthy.” But wealth, like “rich,” is relative — you need more of it to live in New York City than in the Great Plains, noted Chad Chubb, a Certified Financial Planner, in U.S. News & World Report.

Passive Income and Investments

Wealth typically comes from passive income and investments. The IRS defines passive income as earnings you generate from real estate or earn without active participation. Real estate rental income, stock dividends and royalties are all examples of passive income.

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Financial Freedom

Passive income streams perpetuate financial freedom, which allows you to live your desired lifestyle regardless of whether you work. Some live frugally to achieve this freedom. Others have accumulated more than they could possibly spend. Whatever your lifestyle, achieving this goal dramatically reduces financial worries and allows for the pursuit of goals and dreams not tied to money.

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What Is the Difference Between Being Rich vs. Wealthy?

Rich is quantified in money whereas wealth is measured in time, not dollars, explained Robert Kiyosaki, founder of The Rich Dad Company and author of “Rich Dad Poor Dad,” on his website RichDad.com. Specifically, wealth measures how long you can maintain your lifestyle without working.

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Getting Started on the Road to Wealth

Getting started involves committing to build wealth, rather than riches, to achieve your ultimate goal. Rather than having a fixed amount of cash in mind, you need to focus on building the asset base required to sustain the life you want. The following steps can help you achieve that goal.

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The 8-Step Plan to Financial Freedom

Committing to a plan to become financially free is critical to your success. Although plans might differ, most involve suggestions outlined in The 8-Step Plan to Achieving Financial Freedom.

First, you must define financial freedom. This entails deciding the lifestyle you want and finding the funding to pay for it. Steps two, three and four involve budgeting, opening the right accounts and paying off existing debts.

Once you’re out of debt, the fifth step of building an emergency fund will cover the unexpected expenses. Life is unpredictable, so you must prepare for such eventualities. Once this fund is in place, the sixth step of increasing your financial education will help build wealth. From there, you should employ the seventh and eighth steps — investing and building new sources of income.

Build a Passive Income

Warren Buffett once famously said that if you do not learn to make money while you sleep, you will work until you die. Passive income is how people make this type of income.

As mentioned before, people earn passive income in numerous ways. Rental properties, investing and online publishing are just a few of the ideas listed in The 28 Best Passive Income Ideas, GOBankingRates’ ranking of the best ways to earn passive income. By marrying some of these strategies with your existing talents, you, too, can earn as you sleep.

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Think About Investing

A trading account is the doorway to building wealth through investing. Although the thought might be scary at first, GOBankingRates’ How To Invest In Stocks: A Beginner’s Guide can help you get started.

Since 1926, the stock market has returned 10% annually, on average. Much of this wealth comes from rising stock prices. The remainder comes from dividends, or cash payouts made on a periodic — usually quarterly — basis.

Some prefer to invest in individual stocks. Though individual equities come with more risk, they can also produce higher returns. Others investors prefer to utilize mutual or index funds. These are professionally managed baskets of individual stocks or other assets. Funds offer diversification, thereby reducing risks.

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Speak With a Financial Advisor

Financial advisors can help you to both avoid money mistakes and develop strategies to achieve financial freedom. They come in many forms, though admittedly, some show more concern for selling financial products than looking out for your needs.

For that reason, GOBankingRates’ How To Find the Best Financial Advisor for You suggests that you seek out a fee-only advisor who has a financial incentive to watch out for you first. The guide also explains the credentials you should look for. Certified Financial Planners, for example, must pass ethics and competency benchmarks to obtain the CFP designation.

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Professional organizations like the National Association of Personal Financial Advisors can refer you to an advisor who will help you to make prudent money decisions and avoid financial mistakes that could derail your plan to build wealth.

Find the Right Bank Accounts

Finding the right bank accounts is critical to building wealth. A high-yield, low- or no-fee savings account, like those included in GOBankingRates’ Best Banks of 2020 rankings, can help you grow your money faster and is especially well-suited for an emergency fund to help you meet unexpected expenses. Other deposit accounts include checking and money market accounts and certificates of deposit.

Also consider special-purpose accounts like an individual retirement account or a 529 college savings account, both of which provide tax-free growth. Utilizing these accounts for their designed purpose helps you increase your wealth and might shield some of your money from wealth taxation that can drain your assets.

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Finishing Wealthy

Above all else, look at building wealth as a marathon, not a sprint. The relatively few individuals who receive an inheritance, win the lottery or take a high-paying job don’t always enjoy the benefits of living a wealthy lifestyle.

For this reason, you want to turn your assets into wealth generators. Although this will not necessarily lead you to live like the rich, it can help you generate the wealth you need to meet your needs and wants in a stable, sustainable manner.

Up Next: 20 Ways To Save Money Fast

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