Don't Get Rich – Get Wealthy
Good morning and happy Sunday!
Did you know that there is a difference between being “rich” and being “wealthy?” It sounds like a trivial matter, but I assure you it’s not.
Grab some coffee and read on to gain a small bit of understanding on how we approach money.
If you spend your million dollars then you’re no longer a millionaire
“Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”
– Rihanna’s former financial advisor after being sued when the singer nearly went bankrupt for overspending
There is a difference between being “rich” and being “wealthy.” If you don’t understand that difference then you may be making poor financial decisions.
Rich is based on a current income. Someone with a big house, expensive clothes, and a nice car are likely to be rich because it takes money to afford monthly payments. Rich people often go out of their way to spend money and make their status known, but it can come at the expense of taking on liabilities.
Wealth is based on assets. It’s hidden, not flashy. Wealth is the income not spent, and therefore the option to buy stuff later. Wealth offers you options, flexibility, and the opportunity to grow and build more wealth so that in the future you can afford more stuff than you can right now.
Being rich and being wealthy are certainly not mutually exclusive. A wealthy person may spend a lot of money and be extravagant, but when they do that you are seeing their richness, not their wealth.
Two key terms above are assets and liabilities. Simply put, an asset puts money in your pocket, while a liability takes money out of your pocket. Stocks, 401Ks, and businesses are a few examples of assets. Car payments, rent, and credit card bills are examples of liabilities.
The easiest way to get wealthy is simply to accumulate assets over time. This means consistently saving, investing, and growing your sources of income. By doing this your money works for you, and the more money you have saved up the faster it grows!
Taking on liabilities in order to live like a rich person is a dangerous game, and one that can set you back and prevent you from building wealth.
Mike Tyson vs Michael Jordan
Professional athletes are an interesting group to look at when it comes to understanding the difference between being rich and having wealth. They can make an unimaginable amount of money, but the way they live and approach their earnings determines how they end up.
Mike Tyson made $400,000,000 in his career, and he let everyone know it. He famously had exotic pets such as tigers, a fleet of super cars, threw lavish parties, and even spent $2,000,000 on a bathtub! In spite of his earnings (and perhaps predictably), he ended up filing bankruptcy in 2003.
In contrast, Michael Jordan earned $90,000,000 in his 15 seasons with the Bulls. However, he branched out, and today with his investments and business dealings he is worth over 2.2 billion dollars.
The difference between Tyson and Jordan’s financial outcomes is explained by whether they spent their earnings extravagantly and accruing liabilities, or building wealth by investing and accruing assets.
The guy with the expensive car
The following is a story about a rich guy with an expensive car in Los Angeles, an excerpt from Psychology of Money by Morgan Housel:
Money has many ironies. Here’s an important one: Wealth is what you don’t see.
My time as a valet was in the mid-2000s in Los Angeles, when material appearance took precedence over everything but oxygen.
If you see a Ferrari driving around, you might intuitively assume the owner of the car is rich–even if you’re not paying much attention to them. But as I got to know some of these people I realized that wasn’t always the case. Many were mediocre successes who spent a huge percentage of their paycheck on a car.
I remember a fellow we’ll call Roger. He was about my age. I had no idea what Roger did. But he drove a Porsche, which was enough for people to draw assumptions.
Then one day Roger arrived in an old Honda. Same the next week, and the next.
“What happened to your Porsche?” I asked. It was repossessed after defaulting on his car loan, he said. There was not a morsel of shame. He responded like he was telling the next play in the game. Every assumption you might have had about him was wrong.
Los Angeles is full of Rogers.
Being rich is visible, but wealth is actually hidden. You can easily see someone’s enormous house or their Instagram pics of a lavish vacation to the Bahamas in a way that you can’t see investments or other assets that actually make someone wealthy.
Driving up in a $100,000 car certainly sends a message of success, but you only know one thing about someone’s wealth based on their car: they now have $100,000 less than they had before (or $100,000 more in debt).
Note: having an expensive car does not make someone a Roger, and the man you see driving a Porsche may very well be wealthy. But when you see him driving that car up, you are seeing his “richness,” not his “wealth.”
TL;DR
“There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”
– Bill Mann, a famous investor
Wealth ≠ Rich
There are a lot of people who look modest and have wealth, and a lot of people who look rich and live on the edge of insolvency.
Wealth is a prize because it afford you freedom and flexibility to do what you want. It’s the abundance that lets you quit your job when you’re sick of your manager, take your kids to experience Italy on a whim, cut large checks to charities you feel passionately about, and never have to stress about high medical bills.
You don’t have to make 90 million dollars like Michael Jordan to become wealthy, but you do need to approach what you have with a similar attitude of prioritizing the building up of your wealth.
Don’t worry about being rich. Figure out how you are going to build wealth. It’s not an easy task, but it is one that’ll pay dividends.
Money is a means to an end – freedom. Do you understand how it works, or how you should be thinking about it?
Understanding the pitfalls of how we approach money is more simple and exciting than it sounds. The Psychology of Money is a great collection of short chapters on wealth, greed, and happiness. In fact, the chapter this email is based on was only four pages long!
Invest in this book today, and it will pay for itself many times over!
Thanks for reading, and have a great day!
Cooper
Cooper, this one should be required reading for all seniors in high school and perhaps even all college students without business degrees. Have you thought about submitting it for publication? It is well written with a balance of high interest areas. (Of course the high school ELA teacher living within my psyche demands I remind you of the need for citation, but that’s just because of my love for all “My McCalls”🤷🏻♀️😉 )