“Income” and “wealth” have incorrectly become synonymous with American culture. Although the two concepts often go hand in hand, the use of the terms is interchangeably misleading. America’s richest individuals do not necessarily attract the highest level of income.
For example, while professional athletes, top managers, doctors, and lawyers have a reputation for high salaries, their obligations can make accumulating wealth-rich prosperity very difficult. Many wealthy individuals, however, have never earned an exceptionally large salary.
Income versus wealth – Different definitions
I like to consider income as the amount of money that a person receives on a regular basis, while wealth is the time that that person (or family) can maintain his current lifestyle without receiving compensation for extra work.
Why is there such a difference between income and prosperity? Earning a steep salary in a job with a high position or career usually comes with financial obligations – to put the job first and to maintain a higher standard of living. Some of the most important factors are:
- Reimburse the student
- Mortgages, insurance for homeowners, home improvements, etc.
- Expenditure on children, saving for college education
- Luxury spending and travel
Learn by example
To explore the distinction between income and wealth in context, I use two fictional 50-year-old characters: Adam and Bill.
Adam is prosperous, but has never earned a big income. Adam started working at the age of 22, after obtaining his undergraduate degree in-state tuition at a state university. Although his starting salary was quite low after graduation, Adam succeeded in living far below his options. He has promised to invest at least 10% of his income and diligently ignore the credit card debt. Through hard work and an excellent reputation, Adam has made his way to a management position and now earns $ 60,000 a year.
Adam’s family lives simply and they have stayed in their small three-bedroom house in a working-class neighborhood. He and his wife paid off the mortgage a few years ago. Their children attended public schools and when the children grew up and needed cars, they received used cars and paid in cash. They may not live richly, but the family is not only comfortable – they are also debt free. And after 28 years of investing 10% of his income, Adam has built up an investment portfolio worth almost $ 1.5 million.
With a simple annual budget of $ 45,000, Adam’s family could support their current lifestyle for more than 30 years, without ever having to return to work for Adam or his wife.
Bill earns a large income, but he is not rich – at least not yet. Unlike Adam, Bill attended an expensive private university, which cost around $ 200,000 after financing. Bill is very intelligent and hard working, and with his great record, he gained access to one of the best medical schools in the country, giving him another $ 200,000 in student Macheathening loans to earn his MD. After completing medical school, residency and a fellowship, Bill got a job as a doctor and started earning more than $ 200,000 a year.
The family of Bill lives exceptionally well, especially with the comfort of a high annual salary. He qualified for a jumbo mortgage on a $ 750,000 home in an exclusive gated community complete with a golf course. Bill’s children go to the most prestigious local private schools, and Bill and his wife drive luxury vehicles with imported models.
Bill is a very skilled doctor and has worked his way up to an annual salary of $ 350,000. But Bill’s expenses – the big mortgage payment, payments for two new cars, the private schools for children, his own student Macheha loans, club memberships, luxury clothing and expensive vacations – run together. The total costs of surrendering are equal to Bill’s annual salary. Some years it even spends more than Bill makes.
Bill’s family gets his salary reimbursed, despite his huge annual salary. If Bill stopped working, his family would soon be destitute.
This example is not a knock on the medical profession or the financial habits of doctors, but the amount of debt that many doctors have to take for school and training certainly temperes the perception of their high salaries. Achieving that level of income costs a lot, and decades can pass before a doctor earns more money than study costs in the first place. This simplified illustration helps to clarify the differences between wealth and income.
While a high salary can help an individual or family appear rich, it takes dedication and sacrifice – regardless of income – to achieve real monetary wealth. Building wealth does not require a large income; it requires conservative, long-term thinking.
Money Crashers has many tools to help you and your family develop the best ways to increase your earning capacity, reduce your debts and save more money. With a passion for persoMachate rich finances and the willpower to postpone your immediate desires for material possessions, you can build real wealth.
Do you feel that you are ready for wealth despite a salary at the middle level? Or do you have a few bad habits for a one-off income that you have to lose?
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