We often use the words “rich” and “wealthy” interchangeably. Although both refer to people who have more assets than the average person, there are actually some important differences.
Being rich typically means having a high income, so the connotation is that the rich person has above-average money coming in. In contrast, being wealthy refers more to overall worth or net worth. It suggests that a person manages his or her money wisely and is therefore more likely to be financially comfortable in the long term.
So, if I had a choice, I’d rather be wealthy than rich.
Here are six ways in which wealth differs from riches.
1. Wealthy people have a different mindset about money
You’ve probably heard about the celebrities who enjoy a period of sudden popularity that results in a rush of great prosperity — but because these talented individuals didn’t manage their money or plan for the future, they lost everything.
In his blog titled Of Dollars and Data, Rich Maggiulli says that having a high level of income doesn’t guarantee financial stability or lasting prosperity. In fact, he says a high income can actually create a false sense of financial security, leading individuals to overspend and neglect building wealth for the long term. He says being rich isn’t about a particular level of income, but rather is about having a consumption-focused mindset (and the luxury lifestyle that comes along with it).
In contrast, wealthy people tend to have a planning-focused mindset. They take specific strategies to ensure that their money works for them and that they build their wealth over time.
2. Wealthy people typically work with financial advisors
Another difference is that wealthy people typically plan for the future, while rich people often believe and hope their riches will sustain them forever, without planning. That is true in some cases for a few lucky people, but it’s not the norm. As the saying goes, whether in war or finances, “Hope is not a strategy!”
Building wealth involves a lot of preparation — building your vision of the life you want for the future, setting goals for yourself and your family, working with a financial advisor on a regular basis to keep yourself on track toward reaching those goals and working with your advisor to adjust your game plan when you encounter life transitions or unexpected circumstances.
Working with competent, experienced and compassionate financial advisors and wealth managers has many advantages. They will help you grow your wealth, manage your liability exposure and use strategies to pass your wealth on to your designated heirs.
3. Wealthy people tend to pursue many different income streams
Just as it’s smart to diversify your portfolio to offset the risk of a downturn in any one type of investment, wealthy people know it’s also wise to pursue different types of income.
While a rich individual might be blessed with a highly successful career in music, acting or some other creative pursuit, a wealthy individual avoids relying on just one income stream. While a wealthy person may or may not have a job with an employer or run a start-up, he or she might also receive income from investments.
4. Wealthy people tend to stay out of debt
Sometimes, it turns out that rich people aren’t nearly as financially solvent as they appear. We’ve all heard of people who lived in huge, custom-built homes and drove the finest cars, yet they were about to go bankrupt. With massive amounts of money flowing in, it can be tempting to finance major purchases and avoid using cash to pay those items off right now. But debt is costly, especially when inflation is high.
Wealthy people recognize that debt erodes their net worth, and they avoid it. For example, they might use credit cards and reap the rewards they offer, such as cash back and discounts, but they pay those balances off each month, thereby avoiding the often-steep interest charges.
5. Wealthy people manage their tax bills
A huge part of planning and managing wealth is managing your tax burden.
For example, you could potentially save thousands of dollars by lowering your tax rate. By following the advice of a financial advisor and bringing down your taxable income, maybe by making qualified charitable contributions, your tax rate might drop to the next-lowest bracket, thus saving you money.
Wealthy people often work with financial advisors to manage their taxes so they can keep as much of their wealth as possible, legally. To optimize the amount of money they keep, they do what they can, from taking advantage of tax credits to maximizing business expenses to harvesting investment losses. Meanwhile, many rich people are unaware of these strategies.
6. Wealthy people prioritize spending and save diligently
While many rich people seem to spend their money as they like, with no regard for the future, wealthy people tend to be more strategic with their spending. Because they typically work with financial advisors, they know what they want their lifestyles to look like in retirement. Therefore, they know how much they can spend and how much they must save to follow the financial plans their advisors have developed for them.
It's a matter of setting priorities. Whatever brings wealthy people the most joy and satisfaction in life, they know they can spend their hard-earned money on it. At the same time, they understand the importance of budgeting and prioritizing, so they realize they cannot splurge on everything they want. They plan for what they want most and often sacrifice in other areas, if necessary, to obtain it.
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Wealthy people work toward achieving long-term financial success. They focus not just on building assets, as many rich people do, but also on envisioning, planning, designing and striving toward the lifestyles they want for themselves and their families.
How about you? Would you rather be rich or wealthy? Which strategies will you take to strengthen your wealth mindset?
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Tyson Ray and not necessarily those of Raymond James.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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