Rich vs Wealthy; is there really a difference

Personal Finance has many divisive topics. When it comes to the conversation about being rich versus being wealthy you get 3 clear camps. Those who believe that the two are the same thing, those who believe that the two are different things and those that have no idea what is going on. Let’s try to find the separation between the two and what it means for us

Rich

So what does it mean to be rich? Fancy cars, fancy clothes and opulence in everything you have and own? Not quite. While it is fair to say that some rich people do go for the more flamboyant things in life we need to recall that your favourite billionaire’s dull t-shirt likely cost as much as the flamboyant shirt your favourite celebrity wears. So while many will rush to say that rich people are about showing off their abundance I don’t think we can definitively say so. What people will agree with about defining rich people is that they have an abundance of income. That is to say, rich people are high-income individuals.

Wealthy

Now we need a definition of wealth to make this complete. Wealthy people too are defined by abundance. They certainly are not in any shortage of money. As I mentioned when discussing the definition of rich, people will often say that wealthy people don’t show off with what they have but are understated. Again, think about the price of your favourite billionaire’s understated t-shirt. Also, it’s kind of difficult not to look understated with a billion dollars in the bank. I think we can come to an agreement that wealth too is abundance but rather an abundance of assets, not just income.

Assets, in simple terms, are things that generate your income. So to put the two in perspective, rich people are high-income individuals. These people have high incomes, perhaps from a single source but could be multiple sources. Wealthy people are High net worth individuals, having accumulated many assets that generate income, some of them automatically or passively. This would also satisfy another commonly held definition that states that wealth is measured in time, so how much freedom you have with your time or how long you can survive without putting effort into earning more money.

Some rich people are wealthy

If you hated maths in high school I’m sorry for what comes next. I believe the confusion comes in that many people believe rich and wealthy are mutually exclusive. That is to say, you are either categorically rich or wealthy. If we follow the logic there’s no reason why one person cannot be both. A person with a high income can become a person with many assets. However high income is not a guarantee of high net worth. A person without a high income can become high net worth or accumulate assets. It, therefore, follows that a person can be high income but not high net worth. So think of it as a Venn diagram that states that some rich people become wealthy people but not all wealthy people are rich people. So what makes the difference?

Accumulators build wealth

The game of wealth is a game of accumulation. The game of riches is a game of income. Wealth is therefore associated with how much of your income you keep. Keeping it to deploy to owning assets that produce more income and not to look at or swim in. A wealthy person is a person who knows how to keep money. Are your chances of becoming a high net worth individual higher if you are a high-income individual? Logic suggests this is true however practice may have a different answer for us. Having a higher income only counts if you are an accumulator of wealth. Parkinsons law tells us that to the untrained mind expenses will simply rise to meet income so an improved income is not the differentiator, good financial habits and planning make the difference

How much you have to play with certainly plays a part in things but make no mistake that there is a difference between the two. All things being equal you would rather be high income. If you save or invest 10% of what you earn you are certainly better off earning 100 000 than 1000  If you save or invest 0% then it doesn’t make much difference does it? At least for your net worth. The difference between rich and wealthy is ultimately seen over time.