Why income and wealth are different ?
Though this article is not focused on exploring income equality — that’s a subject for another day — its about understanding the difference between income and wealth i.e. why they’re not the same thing.
First, let’s define our terms.
· Income is earning money. Yes, it’s the primary piece of wealth creation, but income itself is not wealth.
· Wealth is having money. If you have a lot of money, you are rich. If you don’t have much money, you’re poor.
Income and wealth are related, but it’s a complicated relationship. Earning money is only part of the equation. What you do with the money you earn has a profound impact on your wealth.
If you earn a lot but you also spend a lot — especially on things that lose value — then you won’t accumulate wealth. If you make poor investments, you won’t accumulate wealth. If you suffer misfortune, you won’t accumulate wealth.
Your income is like water flowing through a pipe. The higher your income, the larger the flow of water. But wealth — net worth — is like a bucket that you’re filling with water. If you have a high-flow hose, but you’re spilling the water on the ground instead of filling the bucket, you’re not going to fill it very quickly. On the other hand, even a trickle of water can fill the bucket if you’re careful and take your time.
In the Real World, I know families with household incomes approaching $250,000,000 that have almost zero net worth. They buy (and sometimes wreck) fancy cars, cars that quickly depreciate in value. They take expensive vacations. They eat out for every meal. They spend a ton on entertainment. These folks have high incomes and live a lavish lifestyle but they’re not rich. If they were to lose their jobs, they’d be in trouble.
On the other hand, I’ve met with many Get Rich Slowly persons who have mundane jobs with modest incomes, yet they’ve managed to build small fortunes (especially in relation to their spending). How? By keeping expenses low. They may not make as much, but they have high a saving rate and they know how to invest wisely.
In conclusion, A high income can fund a lavish lifestyle, but if you spend most (or all) of that income, you’re not building wealth. You’re not rich. The high times probably will not last. (Believing that they will is part of the forever Fallacy).
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