There’s a BIG difference between being rich vs wealthy. But most people don’t realize that. They think that anyone who is a millionaire is wealthy.
At some point in time the meanings of the words ‘wealthy’ and ‘rich’ merged. People think having a high income or big bank account balance is all you need to be set.
Ask your friends the difference between wealthy and rich and you’ll be met with blank stares.
Nowadays, most people think that they mean the same thing. But they don’t. At least we don’t think so.
Between my twin brother and I, we graduated from Harvard, Wharton (UPenn), and the Mayo Clinic School of Medicine. Put simply, we’ve had the opportunity to live with, study with, and spend time with a lot of people who came from families with extreme financial resources. I’m talking about the kids of Fortune 500 CEO’s, hedge fund managers, and other big wigs who are rich or wealthy.
At first, I didn’t see the difference between rich and wealthy, but it slowly became more clear. The distinction is important.
In short, the difference between rich vs wealthy is that one group of people focus on investing, while the other focuses on spending.
The actor Chris Rock seems to have a pretty good understanding between the two.
What Does Being Wealthy Mean?
Simply put, wealth is the accumulation of assets. Those that are wealthy focus on investing.
So does being wealthy just mean someone who has a lot of assets? Not exactly, but you’re getting warmer.
To begin, a wealthy individual follows most of the principles in this beginner’s guide to personal finance.
This means that they save at least 15% of their paychecks (usually more since they are high-income earners), have little debt, have their retirement portfolio in smart investments, and live well within their means.
But the most important distinction is that a wealthy person has a huge net worth. Wealthy people have assets that generate passive income for them. They don’t buy things randomly because they are very methodical and purposeful with their capital.
Most people would not be able to recognize these people as being wealthy because it isn’t based on a flashy lifestyle. They might look like your average person. Blue jeans and sneakers and a normal-ish car.
You might be thinking, “well, what about all the billionaires with private jets, mansions, and crazy lifestyles?!” The fact is that they are outliers. There are less than 600 billionaires in the entire country and nearly 330,000,000 residents in the U.S.
That means that there are fewer billionaires in the U.S. than the number of people you are friends with on social media.
That means that very few people actually fly around in private jets. And you don’t need to be a billionaire to have an incredible amount of wealth and be set for life.
What Does Being Rich Mean?
Being rich simply means having a high income without corresponding assets.
The reason that having a lot of money doesn’t make you wealthy is that rich people also spend a lot of cash. A person who earns $10 million per year but spends $9.9 million on a flashy lifestyle, will have less money at the end of the year than a lot of you. That expensive car looks nice in the driveway, but it could be burning a hole in their pocket since they have so many other bills adding up.
Rich lifestyles consist of a high proportion of an income being spent, resulting in a small amount of investing activities.
That’s the stereotype you think of with professional athletes.
Instead of investing all of that capital, they buy expensive cars and jewelry (they often need to use loans).
For that reason, it doesn’t matter if you are making $250,000 per year if you are spending $225,000.
You’d be better off only making an income of $80,000 and saving half of it!
This is why you shouldn’t judge a book by its cover. You might see someone driving a brand new BMW, but that doesn’t mean that they have a fat bank account.
The Biggest Differences Between People That Are Rich vs Wealthy
For starters, wealthy people cultivate a way of life that maximizes the likelihood that they will be successful. They don’t dabble in fruitless things like gambling or other risky behaviors like drugs.
They cultivate a wealthy mindset and look for ways to work smarter so that they have time to focus on things that matter most. One of the best ways to do that is to generate passive income in order to generate sustainable wealth.
Some assets that the wealthy own to generate passive income include businesses, real estate, or traditional investments like stocks and bonds. That means that their money is generating wealth for them, instead of relying on punching the clock at an hourly job for a paycheck.
This wealthy mindset helps them in building wealth and gives them financial freedom. They focus on long term economic growth. They have that entrepreneurial itch and are driven by ambition, not greed.
Being a rich person looks fun from the outside, but it’s exhausting to know that you can’t sustain it over the long term.
The Problem With Being Rich Is That It Doesn’t Make You Happier
Our feelings toward money and happiness start being shaped during our first moments. As a society, we constantly get the desire for more money drilled into our heads. For kids, having the right toy is all that matters. As a teenager, it might be having the right brands on your clothes. We are basically taught that there’s a direct link between money and happiness.
But while we’ve all been conditioned from an early age to seek more. More things. More respect and prestige. And a lot more money. Research shows that there’s a lot more to true happiness than the size of your bank account, the size of your house, or having an absurdly high income.
Experts agree that after you have enough to cover the basic necessities in life, all of those extra things won’t bring you a meaningful amount of extra long-term happiness. But you don’t even need the research to know that, because deep down you realize it too. You know that money can’t buy happiness. This means that being rich won’t make you any happier than being wealthy.
On the other hand, being wealthy instead of rich means that you have the freedom to spend your time however you want. You also don’t have to stress about paying any bills. This is what will bring you happiness. Money can’t buy happiness, but wealth can. Because freedom can give you happiness.
Can You Actually Go Broke Being Rich?
Absolutely. There are a ton of celebrities that are known to have blown through crazy amounts of money and gone into bankruptcy. This doesn’t even take into account the wealth tax that often applies to those with high incomes.
Nicholas Cage at one point had a fortune of $150 million and lived the lifestyle expected of the rich and famous. After buying 10+ houses, an island, and rare collectibles, he found himself in financial trouble. He had to foreclose some homes and owed over $6 million in back taxes to the government. Ouch.
Compare that to finance guru and billionaire Warren Buffett, who doesn’t let his wealth go to waste. He still lives in the same house in Nebraska that he purchased back in the 1950s for just over $30,000!
Buffet drives the same Cadillac for years but prefers to spend his resources by flying in private jets because he truly understands which things bring him the most happiness. It certainly isn’t having the most expensive car. Just remember that you can’t see the outside of a car from the driver’s seat. Paying for that sexy car is a waste unless you have the cash and financial security to afford it.
Being Wealthy Isn’t Only About Sacrifice
Many people think that to create wealth they need to skip out on all of the fun in life. However, that’s just not true.
The key to building wealth isn’t so much about being cheap as it is about prioritizing happiness.
Research by Harvard Business School Professor Michael Norton has shown that spending on experiences, rather than material goods, brings us more sustained happiness!
Instead of buying the new jacket that just came out, pay for an experience (a show, an art class, a fun trip, etc.).
If you are already responsible with your finances and want to spend more, just be wise. You’ll see that avoiding the things that make you appear rich will allow you to focus on the things that actually make you happy while building wealth.
Experiences can be a lot more cost-effective than buying the latest gadgets too. Once you realize which things you actually need you’ll see that you’ll slowly begin to yearn less for the things you once thought you had to have. All the while becoming wealthy.
If You Can Afford It, You Can Still Have The Life Of Your Dreams
As we mentioned at the beginning, we had the chance to meet and become friends with truly wealthy people due to having gone to Ivy League universities.
We met people who would take weekend trips on private jets, drive $150,000 cars, and eat at the nicest restaurants in the world. We were even lucky enough to be invited on some of these trips on their planes.
But these same people were very careful with the way they spent money. They always invested wisely and had high-interest savings accounts like CIT Bank’s. They realized that money can’t buy happiness so they prioritized experiences. When they would shop for clothes they got extremely excited about sales and finding a good deal. They were experts at saving money even though they didn’t have to be.
In fact, they had amassed enough wealth that as a percentage of their net worth, they spent very little of it. This means that even though they lived an ‘expensive’ life, they still had more money at the end of the year than they started with every single year.
5 Strategies You Can Use To Develop A Wealth Mindset
Don’t get bogged down by your current situation – this is a long-term game
If you talk to a multi-millionaire, they will rarely tell you that they just woke up to an incredible life. They sacrificed a lot, and they still remember the early years when they weren’t sure if they would ever make it.
If you aren’t where you want to be, or your earnings are what you hoped they would be, don’t lose hope. Even if you feel like you are too old or not smart enough to do it, the fact that you are reading this article tells me that deep down you know you deserve better. Poor people have nothing to be ashamed of. I grew up in poverty. What matters is where you end up, not where you started.
It doesn’t matter how much money you have today.
This can seem daunting, but many times, our brains are simply overwhelmed thinking about big (and small) life decisions so here’s what you can do to more easily navigate them.
- Reframe a financial decision so that it’s about a future outcome. Rather than thinking about spending an hour to make a monthly budget, think about sitting down to save $1,000 for the month.
- Realize that financial decisions are no more complicated than other decisions you already make about other things, like the decision about where to eat or how to treat an ailment.
- Remind yourself that even if you believe you rely on affect or emotion to make decisions, that avoiding financial decisions can lead to undue hardship for you and your loved ones.
Keep your operating expenses in check
You were probably hoping for some concrete steps you can take and not just a pep talk, so this is a very specific piece of advice that anyone can start doing today.
You need to reevaluate all of your recurring monthly expenses and decide which ones are actually worth it.
Focus on things that are fixed and don’t change, like your rent, phone bill, cable bill, car bill, student loan payments, credit card bills, etc.
If you have an extra room that you can rent out or can move in with a roommate, it can often mean you can save a few hundred dollars a month. If you do that for a few years, that’s a lot of money that you can use to start a business or pay off debt.
These investments and contributions to your net worth will become like second nature and become lifelong habits that will help you generate even more wealth as time passes.
When it comes to the way I spend money, I always try to keep the principles of mindful spending in mind.
Here is an example from the first few years of budgeting. I initially expected that I would miss not having everything I wanted. I quickly realized that I was wrong. By slowing down on my buying, my brains began to see the world in a different way. I used to spend a lot of time shopping and looking at products on the internet, but now I have less interest. As a result, I have spent more time doing things that add meaning and value to my life!
When a new iPhone is announced, I used to spent hours reading about every new feature. I was obsessed. Now I spend a total of 0 minutes reading about the new features. Now I just go to the store and buy a new phone when I need it. Not when Apple tells me I should upgrade. It’s liberating. I could care less about wearing designer clothes.
Surround yourself with others who will support your long term goals
Few things impact our lives and our ability to succeed as much as those that we surround ourselves with. When I went to an ivy league university for college I was immediately surrounded by classmates who studied around the clock and talked about their dream careers.
It inspired me to work harder and also explore what I wanted to do with my life. So as you look around, don’t just hang out with the same people because it’s what you are used to. Make sure that they inspire you and lift you up.
A wealthy mindset isn’t cultivated in a vacuum. It is fostered by our experiences and connections which are greatly affected by who we spend the most time with.
Envision your life as a successful person and build those habits now
We’ve all seen the dumb clickbait articles online that say that CEOs read 500 books a year and that they all wake up at 4 am to exercise and meditate. All of that stuff is nonsense and unsustainable in the long term.
However, there is a lot of truth in the fact that wealthy individuals are constantly focused on learning and getting better.
They are competitive and hate losing, and you can’t win if you don’t improve and grow.
Does that mean you need to read a million self-help books? No, but it does mean you have to take care of your body. Don’t each a cheeseburger every day and expect to have enough energy to work hard. I mentioned earlier that building sustainable wealth and passive income takes time. So you have to take care of yourself so that you can make it to the end of the marathon.
Something as simple as taking daily walks and practicing gratitude will go a long way to help keep your mind clear and focused.
The longer you wait to change the way you think, the harder it will be to reverse it
Finally, the most important thing is to simply do something today. Reading this article is only the first step. You have to build on it and make a change. Set a goal and act on it.
If you are only starting your career it’ll be easier for you to build and design a life that is aligned with your goals of building wealth so you can live your best life.
So don’t just say that you’ll wait until next year to start making a change. The easiest day to start something is tomorrow, but the most effective day was yesterday. Don’t fall another day behind. This is your life we are talking about. This is about more than simply personal finance.
Camilo is a personal finance expert who was raised in poverty by a single mother and had to learn everything about personal finance on his own. In addition to running The Finance Twins with his twin brother, he has been featured on Forbes, Business Insider, CNBC, US News, The Simple Dollar and other top publications. Camilo began his career as an investment banking analyst on Wall Street at J.P. Morgan. He has a master of business administration (M.B.A.) degree from Harvard University and a Bachelor of Science in finance from the Wharton School of Business at the University of Pennsylvania.