Understanding the Difference: Income vs. Wealth

We have a preconceived notion that being “rich” or “wealthy” is the same as having a high income. Wealth is not the same as income.

First, let’s define the two terms. Wealth is positive net worth of an individual or household. Net worth is the value of the assets you own minus liabilities (e.g. debts). Being wealthy means you have assets and/or investments that generate income exceeding your standard of living expenses.

Income is earnings reported on a tax return. If someone makes $50,000 in income a year but it only costs them $30,000 a year to live and pay off their debts, this person has positive net worth, or wealth. The money can be earned by a regular job or through investments; regardless, if there is positive net worth, there is wealth.

Just because someone makes a high income does not mean they are wealthy. They can be, if they spend less than they earn and have positive net worth. If they spend all or more of their income on a lifestyle that exceeds their income, they are actually poor.

Wealth is not how much people earn or spend, but how much money they keep.

A person who makes $50,000 and has $20,000 for investing each year is wealthier than someone who makes $300,000, lives in a mansion, drives a Maserati, but spends all his income, carries credit card debt, and has no savings. Regardless of his Instagram documentation of his designer wardrobe, luxury vacations, and spacious home, if Mr. Maserati spends all his money and has negative net worth, he is poor. No judgment here, just facts.

How you handle your money is more important than how much money you make. With the right knowledge, anyone can build wealth. Living below your means, paying off debt, investing your savings, and ensuring you have an emergency fund are some simple ways to build positive net worth and wealth.