Wealthy vs Rich: What are the Real World Differences?
Few understand the practical distinctions between someone who is wealthy and someone who is rich, or most think there’s no difference at all.
Ask the average person they’ll not likely be able to distinguish between the two. To most people the two words mean basically the same thing. On the other hand, if you were to ask those who are in-fact actually wealthy the majority would be able to tell you distinctions.
I will tell you right off the bat, that according to the wealthy, the most simplest of differences is that being wealthy pertains more to sustainability and knowledge which leads to a different mindset and actions.
Before we get further into that, let’s first get an idea why is confusion for the average person by using the dictionary (feel free to skip past this part to the next section if dictionary definitions bore you).
Rich:
1. having abundant possessions and especially material wealth
2. having high value or quality
3. magnificently impressive
Wealth:
1. abundance of valuable material possessions or resources
2. abundant supply
3b. all material objects that have economic utility
Definition #1 of each word doesn’t make it entirely clear, one word points to the other.
Definition #2 & #3 at least begin to allude to the actual differences.
Looking specifically at #3 – magnificently impressive: the general image that comes to mind for many people of someone who is considered “rich” is that of expensive and extravagant material possessions. We often think of flashy cars, big mansions, private islands, private jets and those kinds of things.
People who are wealthy can have all of these things too, the two are not mutually exclusive. And on the flip side, someone who is rich can appear entirely ordinary, live in an average house with an average car and average things. So lets go a bit further as to what really makes someone wealthy vs just being rich.
Sustainability & Knowledge
One of the top differences between an individual who is rich and one who is wealthy is how long that wealth or money can actually last.
There is no actual definitive minimum length of time or amount of money or possessions that define someone as wealthy. Just the simple fact of: the longer one can spend their money and continue to maintain that lifestyle without actually being required to keep working to maintain it, the more wealthy they are considered to be.
The next huge difference is knowledge, which then branches of to other areas such as a change of mindset and the confidence to take action. We’ll talk about knowledge and mindset a bit more below.
If you browse around the net a bit you may find some people suggesting that one of the main differences between the wealthy and rich is net worth, but this definitely isn’t accurate, you can have two people with almost the exact same net worth yet one appears rich and the other is wealthy. I’ll further this with an example in a minute but lets talk a little more about sustainability first.
Sustainability
As briefly mentioned above, a huge part of being wealthy has to do with your mindset and how you think and act on certain things. We’ll go further into this in the knowledge section but for now we will show how the sustainability of your money & assets can make you wealthy vs rich.
Sustainability simply means how long your money and assets will last you over the years if that was all that you had (i.e. you’re no longer working). Let me be clarify though that “not working” is certainly not a requirement of being wealthy. Working hard is what helps to increase and grow your wealth beyond what you have now, it generates an additional stream or improved your existing streams of income that allow you to become increasingly wealthy.
The ultimate type of wealth that we are all about on this site could be referred to by some as generational wealth. That being, enough money and sustainability that not only does it allow you to live the life you want to enjoy but that passed down to family and loved ones or to future generations in some form.
Now lets get to the examples.
If you ask your average person what they would do if they were given (or won) a million dollars you’ll hear lots of responses like “if I won a million dollars I’d quit my job!” or even if they wouldn’t quit their job many would buy a bigger house in a nicer neighborhood or a nice new car like a $100k Tesla thinking that they’re smart cause they won’t have to ever pay for gas again, plus their Tesla is super sexy.
A Million Dollar Example
Now we all know that a million dollars isn’t what it used to be, but you can definitely still quit your job with that amount of money. Let’s show you with a money choices/mindset example:
Two people below are given $1,000,000 each. One of them has a wealthy mindset, one has the mindset of an average person. Each person currently works a job making $50,000 a year, both decide to quit the same year they get their one million.
Fred
Fred decides to purchase his current home outright which has a $300,000 mortgage leaving him with $700,000 left to live off of. Fred also decides hey I have $700,000 in cash – buys a brand new $50,000 car, 650k left.
After year #1 – Fred’s Net Worth
House = $306,000 (+6k from appreciation)
Car = $45,000
Cash in Bank = $600,000 (spent 50k on living expenses)
Total: $951,000
Year #5 (follow above lifestyle)
House = $331,220 (2% annual appreciation)
Car = $25,000 (they drop a lot in the first 5 years)
Cash in Bank = $400,000 (Fred has been good and not spending beyond his 50k per year)
Total: $756,000
Year #13 (follow above lifestyle)
Rental Prop = $390,000 (2% annual appreciation)
Car = $20,000 (car replaced)
Cash in Bank = $0 (bought replacement car)
Total: $410,000 (rounded)
I’m sure you can see where this is going. Fred is out of money, he’ll probably need a new car, his bank account balance is zero and all that is left is his house which is now worth approx $390,000. What are his remaining options to survive? Go back to work? Downsize his house?
Jack
Jack takes his entire $1,000,000 and purchases a 4-unit apartment building, each unit rents out for $1250, his annual gross income from these is now $60,000 (4×1250 = 5000; 5000x 12 months = $60,000). $10k of that 60k annually goes to pay expenses on the property (management costs, maintenance, vacancy, etc).
After year #1 – Jack’s Net Worth
Rental Prop = $1,020,000 (+20k from appreciation)
Car = $15,000 (still driving his old car)
Cash in Bank = $4000 (set aside from rental income for emergencies)
Total: $1,024,000 (Jack does not consider his car an asset)
Year #5 (follow above lifestyle)
Rental Prop = $1,104,000 (2% annual appreciation)
Car = $5,000
Cash in Bank = $12,000 (a bit of the previous emergency funds needed to be used)
Total: $1,292,000
Year #13 (follow above lifestyle)
Rental Prop = $1,293,500 (2% annual appreciation)
Car = $20,000 (car replaced)
Cash in Bank = $30,000 (bought replacement car)
Total: $1,300,000 (rounded)
13 Years Later
Fred survived approx 13 years before running out of money and having to go back to work. For most average people that are handed $1,000,000 – they’ll buy more than just a nice car, they’ll also up-size their house and other various quality of life annual expenses, thus lasting far far less than 13 years.
Over the course of the last 13 years Jack has raised rents a mere ~1% per year to 1425 per unit and is now collecting $68,400 in income. This is a sustainable lifestyle that can last not only until Jack dies but it can also be passed on to his friends and family!
This is an extremely simplified example that doesn’t take into account many factors, such as the cost of living going up every single year thus causing Fred’s standard of living to go down each year. $1 today is worth more than $1 in 10 years from now, quite a bit more in fact, I mean just look at Fred’s house which is worth nearly 30% more.
These are factors that the majority of people that are retiring at 65 also don’t consider, if they have 1 million saved up in for retirement to live off of for the next 20 years, in that 20’th year the purchasing power of that same 1 million has dropped in half. As the saying goes a million dollars isn’t what it used to be!
Knowledge
This brings us to the next important key in being wealthy. This is quite possibly the most important of the two, knowledge.
With knowledge comes perception. With perception comes opportunity. With opportunity knowledge is put to use.
First of all, the wealthy straight up think very differently about the exact same topics regarding money than the average person thinks. This knowledge allows the wealthy to have a completely different mindset, an entirely different perception of the world around them. You see an old broken down derelict house? The wealthy sees an opportunity to make $100,000.
Mindset
A mindset is a set of assumptions, methods, or notations held by one or more people or groups of people.
A mindset can also be seen as incident of a person's world view or philosophy of life.
A mindset may be so firmly established that it creates a powerful incentive within these people or groups to continue to adopt or accept prior behaviors, choices, or tools.[citation needed] The latter phenomenon is also sometimes described as mental inertia, "groupthink", and it is often difficult to counteract its effects upon analysis and decision making processes.
When you understand what exactly money is. How it is used. How debt is used. How to make money from nothing. Your possibilities become near limitless.
It is difficult to explain this in but a few short sentences or paragraphs, thus we have another entirely separate and far more detailed article specifically about mindset with many examples (because learning by example is one of our favorite ways of doing things).
Let me start of with a quick example here in a moment.
But let me first also say that it is knowledge that makes you wealthy more than any other one thing. You may have heard before, and if you haven’t I am telling you now, that if you were to take any existing wealthy individual and took every single penny away from them and left them with nothing, they would be able to rebuild the wealth empire from nothing. They have the knowledge to create value where no one else can see it and turn that value into $.
The wealthy have a “value” mindset. While many people think that wealthy got to where they are by being greedy and selfish, in far more cases the truth is the exact opposite, they got there by providing some kind of value and affecting other peoples lives in ways that help others. The more lives that you can provide value to, the more one can make and the more wealthy they can become.
Let’s to back to what was mentioned just above: You see an old broken down derelict house? The wealthy sees an opportunity to make $100,000.
Immediately many people will think I’m talking about “flipping” the house. Buying it, taking out some extra cash (maybe a loan), sinking that all back into the house to increase it’s value beyond what you put into it. If anyone watching those house flipping shows on TV that’s exactly what they do.
But what if you have no money at all? What if you’re starting literally from zero – you can’t get a mortgage because you have no assets and/or no income.
Now keep in mind this is a very simple example, there are many factors that aren’t discussed that would need to be involved (but this is where the knowledge comes into play).
Creating Value from Nothing
We will use real estate in this example since it is one of the favorite tools of the wealthy, however there are many many other areas in life that value can be created from nothing (or next to nothing). We will give more examples in another article.
A rental property, worth $175,000 exists to which there is already a renter paying $1400 a month to rent. Property is up for sale, including tenant at the sale price of $175,000. The house has an detached garage and you decide an extra room could probably go above this garage to which you could add an exterior separate entrance, thus creating a second unit on this property.
You have no money of any kind to complete this process, however you possess all the knowledge required to make this happen and enough statistics about the area to know that you are able to complete this project for $35,000 extra and rent out the new unit for an additional $800 a month.
You knock on the door and speak to the existing tenant telling them that you are a potential buyer of the property but that you would want to do some modifications and add a separate unit over the garage. They have no problem with this and agree to continue being a tenant.
You produce a step-by-step plan of how you will do this and the actual (realistic) estimated costs of the project. You then present this plan to investors. You may think you need a track record or a bunch of connections in order to get an investor interested to supply funds for this project – and while that most certainly helps – all you really need is to find the right investor, one who can see the same opportunity as yourself.
Immediately the average person reading this thinks, but he’s going to steal my deal and my plan! But again, think of it this way, this investor needs places to put his money. He doesn’t like keeping his money in cash because cash becomes worth less each year, he would much rather have it in assets. He also doesn’t have the time to work on little deals like this, but as long as his money is in a guaranteed setup (because you provided the proper step-by-step plan), he has no problem providing funds.
You purchase the property using the investors funds. You make the necessary improvements on the property. You find a new tenant for the extra unit and now the rental income is $2200 from this house. The value of the house is now $280,000 as it has become a duplex. This entire process took you 6 months to complete. You now go to a bank get a mortgage against the house showing that you have a long term tenant and a new tenant, a profitable income of $2200 to cover mortgage payments and over 20% equity in the house. You pay back the initial investor his $225,000 (175 + 35 + 5%) plus the investor gets $100 per month of the rent income from this house for the next 10 years.
Mortgage payments on a $280,000 mortgage at approx 4% for 25 years are ~$1500 a month, of the remaining $700 you must pay $100 to the investor each month, another $150 to a property manager (so you can not worry about broken toilets and go off and work on your next deal) and $150 you set aside each month as an “emergency fund” to pay for repairs and whatnot. You now have over $50,000 of equity in a house (which you could take a loan against if you wanted) and an extra income of $300 a month to do whatever you like with. This entire process didn’t take a dime of your own money.
Even though I said this was a simple example, it may come across as a complex process.
I don’t know what it is you do for work, some of us have complex jobs that require a lot of knowledge, but even “non-complex” can require a lot of special knowledge. Fact is, most people can’t just immediately jump into something and be able to do it without first learning how. Sometimes it takes weeks, sometimes it takes months, sometimes it takes years. This is absolutely no different.
This is also not special some one off example, there are loads of ways to create value with very little to none of your own money, you simply need to knowledge and mindset to both see the opportunities before you every day and then execute them.
We will have an article all about many many different ideas of generating extra money to put towards your wealth generation.
That’s the end of this article and I hope that this at least gives you a glimpse of how the wealthy look at things differently than your average person. Head over to the Wealthy Mindset to learn more!