Rich vs Wealthy: The difference between rich and wealthy explained.
Rich vs wealthy: these two words mean the same thing right? Not exactly! In fact there are important differences between rich and wealthy. Let’s explain the difference…
The definition of a rich person:
A rich person is someone who trades his time for a large income. The rich person is the “asset”; if they stop working the money stops coming in. Often a rich person’s consumption equals or exceeds their income. The rich person has to expend significant mental energy worrying about money.
The definition of a wealthy person:
A wealthy person is someone who has freedom from needing to trade his time for money. The wealthy person has assets that generate considerable income. The wealthy person is not the “asset”; instead of being the asset the wealthy person owns assets. Often a wealthy person’s consumption is conservative. A wealthy person does not have to expend significant mental energy worrying about money.
To better illustrate the rich vs wealthy difference it can be helpful to understand the types of behaviors you may see in a rich person versus those of a wealthy person. Admittedly these behaviors are a bit exaggerated to help highlight the difference between rich and wealthy but hopefully you get the idea.
Behaviors of a rich person:
- Works 60 hours a week in a high-stress corporate job
- Has no passive income; only income coming in is from corporate job
- Suffers from “lifestyle creep” (i.e. spending increases as income increases)
- Leases a new Tesla; fights rush hour traffic each day
- Rents a fancy apartment in the city
- Eats out often at trendy restaurants
- Shops at gourmet markets
- Takes a vacation to Europe and stays in 5-star hotel
- Purchases designer clothes, shoes, and accessories
- Has an expensive gym membership at Equinox
- Gets a new iPhone each time there is a new release
- Never achieves financial independence; works until age 70.
- Spends bulk of time and mental energy collecting more dollar bills
Behaviors of a wealthy person (or an aspiring wealthy person):
- Owns (or owned) a small business
- Has passive income coming in from a business or investments
- Avoids lifestyle creep
- Drives a seven year old Toyota Camry; works close to home
- Owns her own home; could get approval for a larger mortgage
- Prepares most meals at home
- Shops at Costco
- Takes domestic vacation and stays in reasonable AirBNB
- Purchases unbranded or on-sale clothes
- Works out outside or at inexpensive gym like the YMCA
- Still using iPhone 7
- Achieves financial independence at age 40
- Spends time between business interests, family, friends, passions, and hobbies
How to become wealthy:
- Maximize Earnings: Find a career with high earning potential and/or start your own business.
- Minimize Consumption (i.e. Maximize Savings): Take a hard look at your spending and cut back where you can. Avoid the major ‘wealth killers’ such as buying a new car, overextending on an fancy apartment, eating out excessively, and taking lavish vacations.
- Invest Savings: Pour savings into income producing and/or appreciating assets such as stocks, bonds, and real estate.
- Remain patient: Becoming wealthy is not something you do over night. and let compound interest (the 8th wonder of the world according to one Warren Buffet) work for you.
Want to learn more about how to become wealthy? Check out our article on 7 Proven Ways to Become Wealthy.
Rich Person vs Aspiring Wealthy Person vs Wealthy Person: Which One Are You?
Let’s break rich vs wealthy down further and look at some common characteristics of the people in these three groups (we’ve added aspiring wealthy person to this section for those people who are on the path to wealth but not there quite yet). Which bucket do you fall into?
Are you a rich person?
- Active Income (i.e. income from a traditional job): High
- Passive Income (i.e. income from owned assets like stocks, bonds, real estate or businesses): Low/none
- Consumption: High; buys luxuries first
- Trades Time for Money?: Yes
- Trades Money for Material Goods: Yes; majority of money is converted into stuff (i.e. cars, phones, clothes, vacations, dinners out, etc)
- Trades Money for Assets (Stocks, Bonds, Real Estate)?: Minimal
- Has Equity Stake in Business?: No; works for someone else’s bottom line
- Focus on Wealth Creation: Minimal
- Financially Independent: No
- Mindset: Consumption. Often impulsive and unfocused. Keeping up with the Jones’ mentality.
- Summary: High income, high consumption, minimal focus wealth creation. Trades time for money. Trades money for material goods.
Are you an aspiring wealthy person?
- Active Income: Medium to High
- Passive Income: Low to Medium
- Consumption: Low; buys luxuries last if at all
- Trades Time for Money?: Yes but seen as a means to an end
- Trades Money for Material Goods: As necessary; is financially disciplined and a savvy buyer
- Trades Money for Assets (Stocks, Bonds, Real Estate)?: Yes; the difference between income and consumption is invested in assets that can appreciate and/or generate income.
- Has Equity Stake in Business?: Yes; may still have full-time job but also business they started on the side
- Focus on Wealth Creation: Major
- Financially Independent: Not yet but has built and is executing on plan to become financially independent.
- Mindset: Disciplined and patient. Willing to sacrifice short-term gratification for the benefits that come via financial independence.
- Summary: Varied income, low consumption, major focus wealth creation. Trades time for money but as a means to an end. Trades money for assets.
Are you a wealthy person?
- Active Income: Low to High
- Passive Income: Medium to High
- Consumption: Varies depending on level of wealth and lifestyle. Spends in accordance to their wealth preservation plan. Buys luxuries last (if at all) and only after they’ve become wealthy.
- Trades Time for Money?: No. Time is recognized as the most valuable commodity we have. The wealth person has no need to rent out her time to an employer in exchange for wages. A wealthy person has the freedom to spend her time how she wishes. How she spends her time is tied in with her values; it could be spending working a ‘normal’ job, traveling, volunteering, spending time with friends and family, etc.
- Trades Money for Material Goods: Varies.
- Trades Money for Assets (Stocks, Bonds, Real Estate)?: Yes. Money generated from assets is re-invested.
- Has (or had) Equity Stake in Business?: Yes
- Focus on Wealth Creation: Yes however wealth preservation is her primary focus
- Mindset: Freedom. Wealth preservation.
- Summary: Asset rich, receives passive income, measured consumption, major focus on wealth creation AND preservation. Has freedom to spend time as desired.
Being Wealthy is About Having Freedom | Being Rich Often Entails Wearing Golden Handcuffs
One common theme you’ll see is that wealthy people tend to have considerably more freedom than rich people. The wealthy are often free from having to sit in a cubicle for 40+ hours per week, free from having to wear certain types of clothes, free from a commute, and free from having to ask a boss permission for time off. The wealthy have much more autonomy and control over their lives. Many people seeking wealth and financial independence do it not to have the flashiest car or a huge mansion but instead do it for this one reason: freedom.
Rich people, on the other hand, may be stuck in the rat race and be trapped in golden handcuffs. They have a good job making lots of money but they are required to be at a certain location Monday through Friday for at least eight hours per day. Rich people may have to travel even if they don’t want to travel. They may have to miss important events in loved ones lives. It’s also true that they may take an awesome vacation each year, drive a new car, wear trendy clothes, and in general look like the picture of success.
But there is a steep cost for these benefits. They have to trade a huge portion of their time to a company or boss. Because they use a significant portion of their income for consumption they essentially get trapped in these golden handcuffs. If you stopped working how would you afford the car payment, the rent payment to your fancy city apartment, or money to go out and have fun on the weekends? It is very easy to get trapped in these golden handcuffs.
Summary: Rich vs Wealthy
Hopefully this article helps explain the difference between rich and wealthy. In summary…
- Rich: A rich person is someone who trades his time for money. The rich person is the “asset” meaning they have to work to keep the money coming in. This can result in being in ‘golden handcuffs’ if they are also consuming heavily. The rich person has to expend significant mental energy worrying about money.
- Wealthy: A wealthy person is someone who has freedom from trading his time for money. The wealthy person is not the “asset” meaning they have income coming in from assets such as stocks, bonds, real estate, or businesses. Often a wealthy person’s consumption is pretty reasonable. A wealthy person does not have to expend significant mental energy worrying about money.
What would you do if you had the freedom to spend your time doing what you wanted to do? What steps are you taking to put you on the path to wealth? Let us know in the comments below!
Want to learn more about building wealth? Check out 21 ways to LINK.