Most people wouldn’t question the difference between being rich vs wealthy.
But, they are different.
Saying that being rich and wealthy are the same is like saying a credit card and debit card are the same, or that there is no difference between an index fund and mutual fund.
They’re similar to each other, but they have distinct differences that are important to understand.
Credit cards reward you for making purchases with points, cash back, and other perks. Debit cards do not.
Index funds allow you to invest in diversified portfolios for a very low cost. Mutual funds usually charge high fees.
Being rich involves…
…well, let’s just dive into it:
The Definition of Being Rich
Being rich is defined by your income.
It’s usually easy to identify someone who is rich. As a kid, and even now, when you think of rich people you probably think of movie stars, athletes, and celebrities.
You’re not wrong – rich people are the millionaires and billionaires of the world.
Though, the world’s richest people also include doctors, lawyers, wall street investors, and other high-earning professionals.
They’re easy to pick out because they make a lot of money and show it. Whether it’s through fancy clothes, nice cars, or expensive boats, they display their money for the world to see.
The Definition of Being Wealthy
Being wealthy is defined by your assets and net worth.
Identifying someone who is wealthy is not as easy as finding someone who is rich. Being wealthy is measured by how much money you accumulate and save. In general, it’s defined by your net worth.
Unlike expensive clothes and fancy cars, your net worth is not put on display for everyone to see. It’s usually hidden.
Of course, a rich person can also be wealthy. A fat bank account and sports car can go hand in hand, but there is such a thing as stealth wealth as well.
Like a social worker who saved meticulously for 30 years, or a teacher who has a plan to retire early and reach financial freedom, both can be wealthy without ever earning exorbitant amounts of cash in a year.
An Example: Rich vs Wealthy
Comparing the definitions of being rich vs wealthy becomes more clear when viewed through an example.
Below, we’ll look at both:
- A rich professional athlete (Andy)
- A wealthy working-class individual (Carole)
While one example of a rich vs wealthy person does not illustrate all of the differences between the two, it does help showcase some of the key differences.
The Rich: Professional Athlete Andy
Let’s start with Andy, an average NBA player who makes $7.7 million a year over a 10-year career.
That’s $77 million over his playing years! Not bad, Andy. In fact, this type of earning makes Andy one of the richest people in the world.
Most of us would be happy to make $1 million over our working years, let alone 77 times that!
Can Andy, someone who makes $77 million, go broke?
Of course. By spending his money, all of it.
It’s because of lifestyle creep, or incrementally increasing your quality of life as your income goes up. Andy is spending money on things to increase his quality of life. He’s buying designer clothes, nice cars, houses, and whatever else catches his eye at the time.
With such a crazy high income, Andy finds it unnecessary to have a budget or sound investing plan. I mean, he’s rich, right?
This mindset and lack of a plan puts him at risk of spending all of his earnings, living a rich lifestyle, but being left with nothing when it’s all said and done.
He’s essentially living paycheck to paycheck with no financial security.
Andy’s not alone, either. According to an ESPN documentary that covered the sad state of finances for retired players, 60% of NBA players go broke within 5 years of retirement.
The Wealthy: Working Class Carole
Now, let’s take a look at Carole, a member of the working class who many people can relate to. She makes a modest $60,000 a year, which is about the average income of a United States citizen.
Besides the glaringly obvious income inequality, the main difference between Carole and Andy is that Carole has a plan, and it’s not a get rich quick plan. It’s a plan to get financially free.
She sticks to her personal finance plan and keeps savings and investing in her 401(k) for 40 years.
Carole’s plan is not all about being frugal and buying store brand items, she has flexibility in her purchases. She buys things she values, like an annual vacation with her family and high-quality coffee. Though, she also wisely skips on the things she doesn’t value, like high-end cars and designer clothes.
After 40 years of going to work every day, Carole looks at her 401(k) to check in on her retirement savings and loves what she sees:
Carole has saved up nearly $1.8 million in her 401(k), she is a self-made millionaire.
While she is not the wealthiest person in the world, she has successfully built her net worth and become wealthy. She has a nest egg that can provide enough cash flow for her to retire.
How to Be Rich and Wealthy!
Being rich and being wealthy does not have to be mutually exclusive.
Of course, a professional athlete, and high-earners in general, can be rich and build wealth over time. They just need to follow the 3 simple steps below:
Step 1: Generate Savings
The first step to becoming wealthy is generating savings.
At a minimum, you should be aiming to save 10% of your income. This amount will allow you to retire in about 40 years assuming a 7% real annual growth rate.
However, the more you save, the faster you will reach financial independence, giving yourself the option to stop working and retire early.
If you are in a situation where you are not saving as much money as you want to, you have two options:
- Increase your income
- Decrease your costs
Increasing your income can come in many forms, including asking for a raise, getting a new job, creating passive income, or making money through a side hustle or two (multiple income streams is usually better than one).
Cutting costs requires understanding all of your monthly expenses and having a budget. Knowing where your money is going will help you understand where you can afford to pull back.
Step 2: Start Investing
Once you have generated savings, you need to invest it.
Before investing, you should build up an emergency fund and pay off any bad debt (like credit card debt), just as Carole did in the example above.
However, your next step should be to invest, and our guide to investing in index funds can help you get started.
Step 3: Watch Your Money Grow
The last step is the easiest – simply watch your investments grow!
Just as Carole’s 401(k) ballooned to over $1.8 million with 7% annual returns, you need to invest your money to take advantage of compound growth and build sustainable wealth.
Otherwise, your money will sit and lose value because of inflation. There is a big difference between saving, and making your money work for you by investing in the stock market.
Learn More About What it Means to be Rich vs Wealthy
Robert Kiyosaki is an expert in the rich vs wealthy debate. He wrote the book Rich Dad Poor Dad, which is a best seller and dives deeper into what it means to be wealthy.
Kiyosaki says his number one rule for being successful with money and creating wealth is:
“You must learn the difference between an asset and a liability and buy assets.”
In this case, an asset refers to the 401(k) investments that we referenced earlier, and it can also be real estate, bonds, or anything else that appreciates in value.
A liability refers to the high-end cars mentioned earlier, and other costs such as credit card debt.
If you’re interested in learning more on the subject of how wealthy people are actually building wealth, I recommend you check out Kiyosaki’s book:
Final Thoughts: Rich vs Wealthy
Getting rich should not be anyone’s goal. If you have the choice to become rich or wealthy, becoming wealthy is the better option.
Being rich is fun for now.
Being wealthy is fun forever.
To build your own wealth, you can follow these 3 simple steps:
- Save (make money and cut costs)
- Build Net Worth
It’s simple, and it all starts with having a financial plan!