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Wealthy vs Rich. What's The Difference?

When asked this question, most people would tilt their head and say, "isn't that the same thing?". And indeed, if you do a web search for the definitions of both, you'll find them to be synonymous. However, I would argue they have very different meanings.

I would also argue that most people (more on that later) can't be both. So you need to decide which you want to be and this article is going to help you understand the difference so you can make an educated decision on how you want to live your life!

What does it mean to be "wealthy"?

Being wealthy, put simply, means having a high net-worth (total assets minus total liabilities). Being worth a lot of money. Essentially, if everything you own was sold to pay off everyone you owe, there would be a lot of money left over.

It's difficult, and takes a long time, to become wealthy. So most people never accumulate much wealth and therefore are not wealthy, relative to their age and average lifetime income (Wealth Calculator).

On the other hand, it is rather easy to be rich. All you need to do is earn a high income... and spend it all.

Being "rich" means others perceive you as being wealthy. This means living in a big house in a nice neighborhood, driving luxury automobiles, and wearing designer clothing. Taking lavish vacations to exotic places and regularly eating at fancy restaurants. Essentially, you have to do all the things people are conditioned by the media to believe is indicative of having a lot of money.

And therein lies the dilemma...

Do you want to be "wealthy", or "rich"?

The ironic thing about being wealthy... is that the vast majority of people with a high net-worth don't look wealthy at all! They live in a modest home, drive mainstream automobiles, and wear generic clothing. They rarely take expensive vacations and rarely eat out. They live well below their means and save a large portion of their income. Usually 25% or more. Wealthy people are savers.

This of course makes it much more difficult to look rich. Because a person who is saving 25% of their income has to make 33% more to spend the same amount as someone who spends every dollar they make!

What's more, it's almost painful for a saver to "waste" money on luxury goods and services. They would much rather keep that money than temporarily look good, or feel pampered.

One might argue though, that this restrained way of life is unenjoyable. That it would be preferable to spend one's money early in life and take advantage of their youth to enjoy what money can buy. "What good is money if I never enjoy it?" would sum up how many feel.

But does it really have to be one or the other?

Finding balance

Is it possible to become wealthy and also enjoy a level of "rich-ness"? To a reasonable degree, I believe the answer is "yes". You'll have to forgo others perceiving you as having a lot of money, but I think you'll agree that you'll be just fine without that... What actually matters is maintaining an enjoyable quality of life while also saving a significant portion of your income, and this can be accomplished at any level. You just have to budget.

Budgeting is telling your money what to do, rather than wondering where it went.

Most people don't give much thought to their spending beyond, "That sounds good. Yes please". This leads to tremendous waste, typically on things that bring no lasting or meaningful value to one's life. Several beers at dinner, a trendy jacket you don't need, a new car every 3 years, and so on, are all things that cumulatively waste tons of money that could have contributed to your wealth.

This can be kept in check by planning how much you will spend on variable expenses (food, entertainment, etc.) each month or week, and sticking to that plan. For non-variable expenses (housing, transportation, memberships, etc.) you may need to revisit and scrutinize each of these categories, potentially making major changes to bring them in line with wise financial guidelines (Budget Percentages).

As you're creating your budget, or "spending plan" as I like to call it, add an amount for "quality of life". This is money you will spend on something that adds a meaningful amount of "rich-ness" to your life. Maybe you'll spend it on a spa session, a fancy meal, or a hobby item, but spend it on something unnecessary that makes you happy.

Similar to treating yourself to a slice of pizza once a week when on a diet, this quality of life expense will help keep you sane as you get adjusted to your new spending level. And just as everyone needs a goal when dieting to keep them motivated, you should also know why you're enduring all this self-restraint financially!

The payoff of becoming wealthy

While you probably enjoy many aspects of your job, I'm sure you would love to be in a position financially that you didn't need to work to make money. Pretty much everyone, if given the option, would prefer to work because they want to, rather than because they have to.

The beautiful thing about becoming wealthy is that you eventually reach a point where the assets you own, and the returns they produce, are enough to sustain your lifestyle without you having to work another day in your life.

It's difficult to come up with a precise number (that's my job), but you can find a simple calculator here:

  • Make your current age and retirement age the same.

  • Enter your life expectancy based on how long you expect to live (use 90 if you have no clue).

  • Make Social Security income $0. Same for other income.

  • Leave investment returns at 6% and inflation at 3%.

  • Multiply your monthly spending by 12 and use that for the current income field.

  • Put 100% income needed after retirement.

The resulting number is the amount of money you'd need right now to never have to work again. For example, a 35 year old living on $5,000 a month would need about $1.63m to never have to work again.

Just think of how enjoyable life could be if you never had to worry about money again... The things you could spend your time on and people you could invest your energy in. The causes you could support and good you could do for the world. Think of the fun you'd have!

Your number may feel like an impossible amount, but it is 100% possible if you budget, save, and grow your assets. Millions of people have become wealthy and you can too!

You just have to avoid being rich.

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