When thinking of rich vs wealthy, you might feel as though the two are interchangeable. After all, aren't all rich people wealthy and all wealthy people rich?
The reality is that rich and wealthy are two very different terms. They describe two different kinds of people, often with very different lifestyles. This post will dive into what it means to be rich vs wealthy.
What Does it Mean to Be Rich?
Being rich comes down to having a lot of active income or cash in your bank account. An investment banker making $300,000 a year is richer than a retail employee making $22,000 a year.
Oftentimes, people are are “rich” spend their money on very material things. This is reason that most people imagine big houses, fancy cars, and cool watches when they think about someone who is “rich.”
However, being rich doesn't necessarily mean you have a very high net worth. In fact, some of the people who make the most money are also simultaneously the most broke people.
If you're earning $200,000 a year and spend it all on liabilities, you might be “rich” in earnings but you're not going to have any money left over for savings. In fact, many high-profile celebrities have gone broke because of their “rich” lifestyle.
What Does it Mean to Be Wealthy?
Contrary to “richness”, wealth is measured not in dollars but in time. How wealthy you are depends on how long you can afford to live if you didn't work.
Let's say you're someone who has a relatively frugal lifestyle and only spends $5000 a month. If you have $50,000 in your savings, then the amount of time you can live without working is 10 months. If, on the other hand, you have income-generating assets that produce more than $5000 a month, then you can afford to live indefinitely without working, and you are truly wealthy.
Being wealthy is all about amassing assets, building up your net worth, and having your money work for you.
The wealthiest people in the world are often business owners, as running a business is one of the best ways to build up your net worth and increase your cash flow.
Take Warren Buffett for example. He is worth around $100 billion, yet still lives in his humble Nebraska home and doesn't have a very extravagant lifestyle. He has a huge net worth that will last his family for many generations, yet still maintains a reasonable standard of living. Buffett is an example of someone who is truly wealthy.
Rich vs Wealthy: What's the Difference?
The main difference between someone who is rich vs wealthy is how much money each person invests. Rich people might make a lot of money but spend it all, whereas a wealthy person has a lot in savings and invests a lot of their earnings.
Due to this reasoning, it is very possible for somebody who earns more to be less wealthy than someone else. A rich person might make $500,000 a year but if they spend it all on fancy cars and gadgets, they are less wealthy than the person who earns $100,000 a year but invests the majority of it into cash-flowing assets.
Regardless of how they decide to invest their money, all wealthy people know that they need to find a way to turn their cash into assets as effectively as possible.
5 Ways to Become Wealthy
As you've probably realized, it's tough for an everyday individual to build up the income required to be “rich” but very possible for anyone to become “wealthy.”
Now that you know the difference between rich and wealthy, here are 5 different ways to become wealthy in today's day and age.
Pay Yourself First
One of the best ways to ensure that you build long term wealth is to prioritize your investments. This means that every time you receive a paycheck, you take a percentage of it and immediately put it towards investments.
Though it might sound impossible, paying yourself first actually has a psychological effect on you that makes it so that you'll find a way to make ends meet even with the diminished earnings.
The best part is that you can set up your bank account so that a portion of your paycheck automatically goes toward your savings and investments. That way, you can truly “set it and forget it” and make your wealth building automatic.
Pay Off Your Debt
If you want to achieve true wealth, you'll want to eliminate all of your debt. It's very hard to build wealth when you have high-interest debt with rates of 20%-30% eating into your earnings every year.
Paying off your debt should be an absolute priority if you want to build any meaningful wealth. Make sure to start with your highest interest debt and then slowly work to pay off all your debt.
Try to see if you can refinance your student loans or negotiate better terms on your mortgage. Any effort you make towards paying off your debt is worth it in the long-run and helps you start on the journey to wealth-building.
Invest as Much as You Can
Always remember that the main difference between wealthy people and rich people is that wealthy people invest their money. Investing as much money as you can is one of the best ways to accelerate your wealth-building journey.
For a lot of people, the wealth-building process starts with the stock market. Taking a chunk of your money and putting into long-term index funds is a good way to start making your money work for you and (hopefully) beating out inflation year over year.
For those that want to take it a step further, they invest in their own business. As previously mentioned, some of the wealthiest people in the world are business owners. That is because business owners know how to make their money work for them and also how to make other people's time work for them.
Finally, a common investment that is owned amongst nearly all wealthy people is real estate. Due to the fact that real estate lets you take advantage of leverage, it is a fantastic tool for not only preserving your wealth, but also compounding it throughout the years.
Regardless of how you choose to invest, make sure you do it soon! The biggest factor to investment returns is usually how early you start. So if you're twenty years old, start investing immediately even if you can't invest a lot. It will make a big difference in the long run!
Don't Splurge Unnecessarily
One of the easiest ways to ensure that you have enough money to invest is to live within your means. This means not splurging on unnecessary expenses and cutting down on all spending significantly.
You could be consistently saving for a long period of time but one single large expense could completely throw off your wealth-building journey. So think twice before financing that fancy car or getting that newer iPhone model.
Splurging on things that you don't need is often the result of a lack of motivation or financial goals. As soon as you realize that every dollar you put towards your investments is another dollar that starts working for you and for your financial dreams, you'll be more motivated to save more and invest more than ever before.
Review Your Long-Term Financial Goals
The toughest part about reaching any goal is sticking with the process for long enough to see substantial results.
This is true in all areas of life including your finances. If you want to get wealthy, you'll need to keep on working towards it in both good times and bad times. Something that can significantly help with that is reminding yourself of your long-term financial goals every so often.
When you feel like quitting, remind yourself that wealth is a process, not a destination. It takes years to amass enough savings to be “wealthy” and almost nobody can do it overnight. Having clear long-term financial goals to work towards will make the wealth-building journey that much easier.
Rich vs Wealthy: Your Mind Makes All the Difference
When it comes to being rich vs wealthy, the important distinction is that wealthy people save and invest most of their earnings whereas rich people might not. You can be very rich in earnings yet still end up broke after a few years.
For that reason, it makes much more sense to strive for wealth instead of for riches. After all, wealth is something that is sustainable and can be passed on from generation to generation.
This post has covered the precise difference between being rich and being wealthy, and it has also given you five steps to follow that will improve your chances of becoming wealthy. At the end of the day, it's important to remember that the most important factor in your wealth-building journey is your mindset.
If you can take on a growth mindset and dedicate the time and energy required to commit to the wealth-building process, a small part of you is already quite wealthy. It's only a matter of time before your financial accounts catch up to reflect your internal wealth.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.