Back when I was in college and at least partially supporting my education as a real estate agent, I learned the not so subtle difference between income and wealth. I was out driving with a colleague (who later became a great friend and mentor), and made a comment about how wealthy a certain neighborhood was.
My future friend corrected me. “I wouldn’t call it wealth. I’d say it’s high income.” In my early 20-something mind, I wasn’t sure what the difference was, or if there even is one. “What’s the difference?” I asked.
He explained in his own words – which I’ve long since forgotten – but I’ve never forgotten that there is a difference, and understanding what it is, is a critical part of understanding and achieving financial success.
Here’s my own over-simplified definition: Income is what you earn – wealth is what you have.
Does the difference between income and wealth even matter?
When economists and government statisticians begin grouping and tagging people according to wealth, they typically do so by breaking down income brackets. The upper class earns over X dollars per year, the middle class earns between Y and X dollars per year, the lower class earns less than Y dollars per year. I suppose they do this as a convention – income is easier to track and measure than wealth.
But I think it misses the mark.
A person can be high income – even very high income – but still not be wealthy. Consider the financial factors that might keep a high income earner from being wealthy:
- An equally high level of living expenses – high house payment, privates schooling for children, alimony or child support payments, or very high medical expenses, for example.
- An excessive level of debt.
- An absence of savings and investments.
- A lack of ability to budget.
By contrast, a person could be wealthy without having a high income. Think about all the retirees who have million dollar investment portfolios, but who only had relatively modest incomes during their working years.
Wealth is a goal – income is a tool
Let’s start with some formal definitions of income and wealth. Dictionary.com defines wealth as:
“A great quantity or store of money, valuable possessions, property, or other riches…or…the state of being rich; prosperity; affluence…”
It defines income as:
“The monetary payment received for goods or services, or from other sources, as rents or investments…”
Breaking it down to practical application, we can think of income as the tool that allows you to acquire wealth.
This is an important concept to grasp. Millions of people, mistakenly believing the income is wealth myth, spend entirely too much time and effort always trying to earn more money. This can be the classic Catch-22. Your income may increase, but if your cost of living and debt rise in step – and your savings and investments don’t – you will be caught in the trap that enough income is never enough.
It’s exhausting just thinking about it.
Wealth can be about more than money
Where income is purely financial – it’s measured strictly in dollars earned – wealth can be about so much more. Wealth can be money, or it can be the things that create money in your life:
- The ability to generate income
- Certain high value talents or skills
- An investment portfolio that generates unearned income
- Intellectual property
- Significant network connections
- Passive business income streams
Wealth can also be about factors that have nothing at all to do with money, or are only loosely connected, such as:
- Excellent health
- A high quality of life
- Close relationships with family and friends
- A low cost of living
- A debt free position
It seems that these should be the goals of having wealth, while income is primarily the means to achieving it.
If perpetually chasing a higher income is something of an illusion, working to acquire the trappings of wealth is it’s close first cousin. These are possessions that give the outward appearance of wealth, but don’t represent wealth itself, at least in a purely financial sense.
Some examples include:
- Trading up on your house every few years, or living in one that eats up a disproportionate amount of your income.
- “Investing” too much money – or creating debt – with status cars.
- Joining country clubs and other organizations primarily to socialize with people who you hope to become.
- Engaging in activities or making other significant purchases primarily to boost your social standing.
Chasing the appearance of wealth is one of the primary reasons people never become wealthy at all. Income that chases faux wealth and a higher standard of living never creates the kind of wealth that produces financial independence and all the other benefits that financial wealth can bring.
One of the best ways to become wealthy: Live beneath your means, and save and invest the difference. Put another way, favor stocks, bonds, real estate, mutual funds, retirement assets, and business ventures over consumer goods and lifestyle when making major money moves.
Wealth can have a greater impact on your sense of well being than your income
Should you be concerned about the difference between income and wealth at all? After all, a high enough income can bring the kind of lifestyle that you want, can’t it?
Absolutely, but wealth can bring you even more, even if it means living below your means to acquire it.
Wealth can bring peace of mind. If you have enough money, you won’t be worried about losing your job. You can choose to live life on your own terms. You can pick the work you want to do – and even how much of it you will do. Wealth can bring you a sense of well being. That should be the real financial goal.
Chasing income – without acquiring some level of wealth in the process – is like running on a treadmill. Lacking substantial financial assets, you will always be primarily dependent on your income to survive. You may even spend a lot of your income trying to reduce the stress of that complete reliance. As beneficial as a high and rising income may be, there’s no light at the end of that tunnel!
While you’re working and increasing your income, make it a priority to invest more of it in building wealth. Even if you’re gung ho about your career right now, the day may come when you’re ready to ditch it all and go in a completely different direction. And when you do, the wealth that you’ve retained in your life will be one of your very best friends.
Have you though much about the difference between income and wealth – and which one you may need to prioritize?