Defining wealth versus income
Official definitions of wealth include having an abundance of money, valuable possessions or material things. But this doesn't quite cut the mustard. Taking it a step further, wealth for our purposes is defined as having enough of said money and valuable possessions to preserve your current lifestyle without having to work to do so.
Income, on the other hand, can simply be defined as earned compensation for performing a service, selling goods or property. Passive income is also included, which would include income earned from financial investments.
Here are two women as examples:
Sally makes $100,000 a year (aka a six-figure income) but is by no means wealthy. She makes just enough to cover the rent on her expensive New York City apartment, pay student loans, cover the minimums on her credit card payments, pay groceries and has a little saved for a rainy day.
Rebecca on the other hand makes the same $100,000 a year but has managed to save prudently while maintaining a modest lifestyle. Though she makes a handsome salary, she's chosen to live a debt-free life with $2 million saved from various investments. She can easily choose to retire now and live on roughly $57,000 for the next 35 years without needing to work again.
The lesson? While Sally makes a six-figure income, she is just about broke. Rebecca is wealthy. We want wealthy.
Steps to generating wealth
Investopedia gives a simple breakdown on how to generate wealth: make it, save it and then invest it.
1. Making it. When thinking about generating wealth, this is the first step. How will you make enough to not only cover your living expenses but save the rest to invest in other areas to build long-term wealth? The goal is to be in a position where you don't have to work or earn money to maintain your lifestyle. Making it includes earned and/or passive income. This can include the traditional route of going to school and securing a high-paying job while living on a modest income or earning passive income by accumulating a massive rental portfolio in which you are earning income and building assets. There are many ways and combinations that can help you achieve your goal of making enough money to become wealthy.
If this is a struggle for you, ask yourself the following questions:
2. Saving it. Now that we've covered making the money, let's discuss saving it. Many people delude themselves into thinking they don't have enough to save, but this is rarely the case. They usually have a spending problem that includes too much fat in the budget. If this pertains to you, stop that. Get a realistic budget and stick to it. Get rid of the extra stuff you don't need, and get serious about your long-term goals. Your budget is a living document, and it can and will change. This is OK. Maintain your goal and be purposed in your daily spending. It's easier said than done, but if wealth is your ultimate goal then the financial whims of today need to take a back seat.
3. Investing it. Investing your money requires a gut check. In other words, what's your risk tolerance? If you're like me, then you think the stock market is a fool's errand that should be avoided. If you're like others, then the stock market is your playground. What can you tolerate? Other options for investing your cash include real estate investments such as flipping or buying and holding properties to build equity while making a profit on the rents collected. How you choose to invest your money depends on your values and risk tolerance. I tend to lean toward real estate because this is an area I've studied carefully while taking into account all of the risks and potential benefits. That works for me. What investing strategy works for you?
Income and wealth, while related, are very different. Many of us can earn an income but few are truly wealthy. When considering your path to creating wealth, review the above-mentioned strategies and chart your path. Not having to get up and go to work is a great feeling because you now own your day. On the other hand, working for a paycheck maintains your position in having to work for a living. What works for you? Start there.
Do you have a plan to become wealthy? If so, what is it and how do you plan to get there? Share your thoughts in the comments below.
Ginger Dean is a licensed psychotherapist and founder of the personal finance website Girls Just Wanna Have Funds.