Lots of people dream about being rich one day. But is it possible that what they really want is to be wealthy instead?
These two terms are used in our society almost interchangeably. However, as similar as they may seem, they have very different implications when it comes to how you manage your finances.
In this post, we’ll explore what it means to be rich vs wealthy, and how understanding the difference can help you to achieve financial freedom.
What Does it Mean to be Rich?
The definition of being “rich” means to have a great deal of money. Usually, when you think of a person who is rich, it conjures up images of someone who can freely spend on whatever they please: nice clothes, expensive dinners, exotic travel, etc.
There are lots of ways that a person could become rich:
- Have a high-paying job
- Receive an inheritance from a deceased relative
- Be awarded a settlement from a lawsuit
- Win the lottery
While having lots of money can seem desirable, the subtlety that is often missed is how it was acquired in the first place. Additionally, without a system in place to ensure that this lifestyle will be maintained over time, rich people are often at risk of going broke.
This is something that happens frequently to celebrities. Many of them quickly become rich and go from barely just getting by to buying a house in Beverly Hills. However, if their next movie is a flop or their spending goes out of control, then it creates instability for their finances that can lead them to file for bankruptcy. Just check out these 25 celebrities who had it happen to them.
The same is true with people who win the lottery. For a short while, they have more money than they probably ever could have imagined. But studies show that about 70 percent of lottery winners go bankrupt within a few short years.
The theme in these situations is unsustainability. These people might become rich and have lots of money now, but how long will it last? What are they doing to make sure it will grow and provide for them in the future?
What Does it Mean to be Wealthy?
Being “wealthy” is defined as having an abundance of valuable financial assets or physical possessions. Although that might sound very similar to how you’d describe someone who’s rich, there are some important differences.
A wealthy person focuses on putting systems in place to maintain their standard of living. This is beneficial from two perspectives.
The first is that they have assets that generate wealth even when they’re not working. These earnings might come from:
- Business income
- Rental income
Instead of buying things that will likely add no value to their net worth, they purchase assets that will effectively produce more money.
In addition to producing more revenue, a wealthy person will also keep their living expenses capped to their income level. Whether that’s $5,000 or $50,000 per month, as long as they’re spending less than they earn, then they’re living sustainably below their means.
Again, even famous movie stars and lottery winners have to think about these things if they want to be wealthy and not just rich. Instead of wasting their money on a new house or luxury car, they could use it strategically to start a business or work with a financial advisor to foster its growth. That’s going to put them on a path to retain financial security as opposed to just spending it all or going into debt.
How Do You Become Wealthy?
There are five important things you can do to go beyond being just rich and build sustainable wealth.
1. Get Financially Educated
Its often said that one of the best investments you can ever make is in your own knowledge of money and how it works. The more you know about how to properly manage your finances, the more actions you can take to promote its growth. Additionally, you’ll also know how to spot characters who are there to take advantage of you.
There are several inexpensive ways you can do this: Reading books and blog posts, watching YouTube videos, listening to podcasts, etc. You can sometimes also find local free classes and workshops offered by community organizations and groups.
2. Live Below Your Means
No matter how much money you make, the quickest way to lose it all is to spend more than you earn. This is generally how people you would consider to be rich like high-paid executives and celebrities have gone from riches to rags.
Instead, always follow the golden rule that you must have more money coming in than is going out. Get familiar with your spending habits and start tracking them regularly. Set limits for yourself that will ensure you don’t spend more than what you’re earning.
If you start to notice your expenses are rising, make adjustments to get them back on track. A great way to monitor them at all times is to use a budgeting app like Buxfer. Buxfer automatically connects and syncs with all of your bank and credit cards, so that way you’ll always know where you stand financially.
3. Stay Out of Debt
It’s almost impossible to build wealth if you’ve got money leaking from your budget in the form of debt. That’s why whenever possible, you should avoid debt at all costs.
Aside from a mortgage and occasional auto loan, there’s no need to rack up a credit card balance or take out a personal loan. Proper budgeting and an emergency fund can help ensure this won’t happen.
If you have debt already, make it a priority to pay it off immediately. Consider using an accelerated payment strategy like the Debt Snowball or Debt Avalanche methods to eliminate it as quickly as possible.
4. Save and Invest as Much as Possible
To buy assets that will generate income, you’ll need to devote a hefty portion of your income to savings. Strive to save as much as you can: 10%, 20%, … even 50% if you’re capable.
With those savings, don’t just let them sit in a bank account collecting zero interest. Invest in securities that will produce long-term compound growth such as stock market index funds.
5. Create Multiple Streams of Income
In addition to investing, explore other things you could buy that will produce earnings. This might be real estate (such as rental properties), business interests or partnerships, or even intellectual property rights (such as a website or e-course).
The more of these types of income-producing assets you can acquire, the more money you’ll have coming in. That’s going to help you build your wealth in a way that’s sustainable and long-lasting.
Image credit: Pexels