Thursday, July 7, 2011

Wealth versus Income

Many people don't understand the difference between INCOME and WEALTH - and in most cases, the two are unrelated.

I get a lot of queries like this one:

"What are the assets of someone making $250,000?"

Many people assume (wrongly) that someone MAKING a lot of money HAS a lot of money - when this is usually not true.

And the same people assume (wrongly) that someone who HAS a lot of money MAKES a lot of money - and this is usually also untrue.

As noted in the Millionare Next Door book, most folks who have a lot of money don't actually make a lot - their income is often less than 7% of their assets.

They don't make a lot, but rather, they save a lot, invest a lot, and don't spend a lot of crap - the crap that most of us idiot consumers buy, because the television said so.

You may see old Joe driving his clapped-out Chrysler and think, "Poor old Joe, he is poor!  He doesn't have a new leased Lexus like I do!"

But Joe has a million dollars in the bank, and you'd never guess it.

I met a guy like Joe the other day over on a neighboring island.   There is a coin-op car wash there and it is cheap and clean and well-attended.  I met a guy emptying the money changing machine and told him it was the nicest car wash around.  He said, "Thanks.  I own it."

And yet, here he was, wearing blue jeans and an old work shirt, driving a clapped-out pickup truck.  His customers had nicer cars than he did.   But he had more money than they did - and most would have assumed, as I did, that he was some low-level employee - some burnt-out alcoholic - who was hired to empty the money changer and re-stock the soap dispenser.

But most of us are convinced that having a huge income means we are wealthy, even if we are spending it faster than we are making it.

But wealth is not a W-2, but how much you have invested - your net worth.   You can make a million dollars a year and be broke - if you spend a million-and-one dollars a year.  And for most Americans, this is the case, living "paycheck-to-paycheck" on $100,000 a year, $174,000 a year, or even $250,000 a year.

Wealth is not money you make, but the money you KEEP.  Think about owning money.  Most folks think about money as something flowing through their hands - the cash flow mentality.  You can't make money through cash-flow, however, you can only spend it.

Wealth is how much money you OWN, not OWE!