I used to think the terms rich and wealthy were interchangeable, that both meant you had loads of money. I realised I was using the definition of rich for both words.
(To be) Rich: to have more spending power than the average person.
If, for example, the average person in your country earns $40k a year and you earn $400k, you’re technically rich because you have more spending power than they do.
If the average cost of a restaurant meal is $40 and the average person can comfortably afford 2 per week, you can comfortably afford either 10 or two $400 meals per week.
Having more money means having more spending power; when you can afford to spend more than the average person. Being well above average in terms of sheer money supply makes you rich. Conversely, having an amount of money far below the average would make you poor.
To put it crudely, you‘re rich when you have more money than the average person.
This doesn’t make you wealthy though. If you and an average person both lost your jobs on the same day both your incomes would stop. You’ll have more money than them in pure amount of money in your bank, but soon enough, without an income, both of your money supplies will run out.
They may even run out at a similar rate — the more money a person earns the higher their outgoings tend to be. The more money you earn, the bigger the houses you tend to live in, the nicer the car and the pricier the establishments you frequent. The percentage of a persons income spent on rent and other things will often tend to be the same regardless of how rich they are.
Being rich doesn’t mean being wealthy.
You could win the lottery — you’d be rich because you’d have more money than most other people (hence more spending power), but you could just spend it all on luxuries and have none left at the end, stripping away your status of ‘rich’ (which happens to a LOT of lottery winners).
True wealth is to do with the difference between assets and liabilities.
Asset: something which puts money into your pocket.
Liability: something which takes money out of your pocket.
Most homeowners see their houses as their biggest assets, but if you own the house you live in, it’s both an asset and a liability.
It’s a liability because it takes money out of your pocket - each month you have to pay mortgage and bills. It’s an asset if you decide to sell it, then it puts money into your pocket. Rent, bills, loan payments and credit cards are all liabilities because they all take money out of your pocket.
Assets — things like rental properties, stocks, businesses, investments — can put money into your pocket. Assets can be bought and sold and a true asset is anything which pays you a passive income; an income without you having to do full time work for it
A job is not an asset because it’s active income , not a passive income— you get paid directly for how much work you do. You lose the job, you lose the income.
A person with wealth is someone who owns assets which pay them passively.
Being wealthy doesn’t necessarily mean being rich, it just means owning assets which pay you passively. The more assets you own which provide you an income you don’t need to work for, the wealthier you are.
True wealth is when the passive income from the assets you own is high enough to cover your costs of living that you no longer need to work to survive.
Truly wealthy people spend their money on assets (like businesses, property, investments) and not liabilities. They spend money on things which puts money back into their pockets. They invest in their own education in order to make more money, buy more assets to make more money, then buy more assets with the money they made from their assets.
People with a poor mindset buy liabilites — things which take money out of their pockets. They buy cars with monthly payments, expensive items which depreciate over time, luxury brands and designer goods, all things which take money out of their pockets and put almost none back at all.
This is how a rich person can become poor and a poor person can become rich.
If a rich person spends only on liabilities, they’ll run out of money and become poor. If a poorer person spends on assets, little by little the assets they spent their money on will make money, which they can use to buy more assets, making them even more money. This is how a non-rich person becomes wealthy, and then becomes rich.
Being rich means having lots of money, being wealthy means owning assets which put money into your pocket.
To become wealthy, spend your money on assets which make money passively. To become rich, buy more assets with the money your existing assets make, until the passive income from your assets is higher than your cost of living, and eventually higher than the spending power of the average person.
This is the difference between being rich and being wealthy, and the path to being truly wealth, truly rich and, most importantly, being able to stay rich.