If you look in the Oxford English Dictionary and compare the definitions of “rich” and “wealthy”, you’ll find that they mean roughly the same thing. But in practical terms, people tend to use these two words differently. In a nutshell, being “rich” generally tends to indicate that someone has a high income, while being “wealthy” means a person has a high net worth.
Of course, the issue is a bit more complex than that. Here are some of the key differences between rich and wealthy people, along with some tips for cultivating some wealth of your own.
What Factors Determine Whether Someone Is Rich vs. Wealthy?
To really understand the difference between rich and wealthy, you need to look closely at a few different factors:
Rich and wealthy people have a lot of money. However, someone who is rich may depend on income from a job to sustain their lifestyle.
Wealthy people, on the other hand, primarily make money from existing investments and assets. Many wealthy people have multiple streams of passive income:
- Rental income
- Income from interest
- Capital gains
- Business income
Thanks to diverse, relatively stable sources of passive income, most wealthy people do not depend on income from a job to sustain their lifestyle.
Assets, Debts, and Net Worth
Both the rich and the wealthy may have a lot of money, but net worth is a key differentiator. Net worth is determined by subtracting liabilities from assets.
➕ Assets include anything with value: stocks and bonds, bank accounts, homes, etc.
➖ Liabilities include any type of debt, including mortgages, car loans, and other bills.
Because wealthy people tend to focus on cultivating more wealth, they often have more assets and fewer liabilities, leading to higher net worth.
Wealthy people typically pay attention to whether their assets are appreciating or depreciating. Appreciating assets (like real estate, currency, stocks, and bonds) generally grow in value over time, so they tend to be sound investments.
Depreciating assets (like vehicles and some, but not all, buildings) lose value over time. To continue to build wealth, many wealthy people will seek out appreciating assets over depreciating ones.
Rich people may often be less concerned with developing wealth, and more concerned with maintaining their current level of income, so they often have fewer appreciating assets. They also may use credit card debt to supplement their spending, resulting in lower overall net worth.
Some rich people like to advertise the amount of money they have, so they may spend more on depreciating assets than on appreciating assets. For example, they might buy expensive electronics or high-end sports cars.
Living expenses can put a dent in anyone’s income. But there’s typically a pronounced rich vs. wealthy difference when it comes to living expenses.
Of course, both rich and wealthy people need to purchase basics like food and household supplies. Rich people may typically have more expenses related to debt, including car payments, mortgage payments, and student loans.
By contrast, wealthy people are more likely to own homes, cars, and other assets outright. Since they have fewer debt-related expenses, they have more of an opportunity to re-invest any monthly income they make.
While this is not universally true, rich people often live lavish lifestyles that flaunt the money they have. Some get carried away and spend more than they earn by using credit cards.
This type of lifestyle might lead other people to perceive them as rich. But over time, these habits erode wealth.
For wealthy people, showing wealth tends to be less important than creating it. Wealthy people usually aren’t flashy, and their primary focus is on building their wealth to create a sustainable lifestyle.
Essentially, these lifestyle differences exemplify the rich vs. wealthy mindset: rich people are (often) more focused on appearances, while wealthy people are more focused on wealth itself.
How Wealthy vs. Rich People Handle Their Money
There’s a well-known phenomenon of lottery winners losing their earnings in a matter of years, sometimes descending into considerable debt. Why?
Some of it’s due to a lack of knowledge. People who suddenly become rich typically don’t have the skills to manage a large amount of money, and they often don’t seek out professional advice.
Another reason is that many lottery winners view the sudden windfall as “free money.” People tend to handle “free money” like this differently than they would handle their own earnings.
Earnings are more likely to go to essential expenses like utility bills and car payments. Lottery winnings are more likely to go to expensive extras like mansions, luxury cars, and lavish vacations. Moreover, many newly “rich” people have much of their net worth tied up in the stock of a single company. As the stock market shifts, these people might see their wealth drop dramatically.
That isn’t to say that wealthy people don’t flaunt their money or suffer from financial volatility too. The wealth they’ve amassed just tends to be more diversified. Also, wealthy people are more likely to use their money to build more wealth rather than spend it extravagantly. They may live lavish lifestyles, but those lifestyles are more often lived within their means, meaning they don’t usually go into debt to finance them.
How to Become Richer or Wealthier
If you’re like most people, you’d love the chance to become richer or wealthier. Maybe you’re stuck living paycheck-to-paycheck or are currently tackling a mountain of debt. Here are a few tips to help you start moving toward the goal of wealth.
1. Look for Opportunities Instead of Complaining
When you feel discouraged in life, it’s easy to complain about your situation. But in many cases, complaining only adds to your stress and keeps you stuck. Focusing on opportunities might not magically make you rich, but it makes you more likely to seize moneymaking opportunities.
2. Live Below Your Means
You can’t start cultivating wealth if you’re spending every cent you earn. When you live below your means, you have more opportunities for investments and other long-term wealth-building strategies.
☝️ Take a lesson from Ingvar Kamprad, the founder of Ikea: Kamprad flew coach for business and often took the bus to get around town.
3. Set Goals
Lots of people dream of being wealthy, but how many actually set out a plan to do so? Having a wealth creation strategy based on reason (rather than emotion) will guide your efforts. In most cases, it’s best to seek out a wealth management advisor to help you do this.
📚 Read more: How can we set financial goals and actually achieve them? One proven answer is to set S.M.A.R.T. financial goals.
4. Avoid Debt
Going into debt allows you to acquire things you couldn’t get otherwise. However, interest rates take a chunk out of your income, giving you less money to invest. And when it comes to being rich vs. being wealthy, prioritizing investments is an effective way to move toward wealth.
Do your best to buy only the things you can afford with cash. Of course, this isn’t always possible. If you need to finance a car or home, make sure the monthly payments are affordable, and you’re getting the best interest rate you can.
As a general rule, it makes more sense to use debt to buy an appreciating asset, like a home or land, than to buy a depreciating asset, like a car. You may still need to finance a car, but it makes sense to buy the cheapest car that will serve your needs and pay it off as fast as you can.
5. Establish a Diverse Investment Portfolio
When your investments are spread out across multiple companies and industries, you stand a better chance of developing durable wealth. Durable wealth can withstand sudden disruptions like stock crashes.
If you have all or most of your investments tied up in one company (like Musk with Tesla), an unexpected event may be able to wipe out a large portion of that wealth overnight.
Moving Toward Wealth
If given an option, chances are good that most people would choose to be wealthy rather than rich. But too many people dismiss wealth as a distant dream, and they don’t even try to develop it.
While it’s not a guarantee, creating a plan may well help you join the ranks of the wealthy one day.