“Income” and “wealth” had incorrectly become synonymous in American culture. While the two concepts often go hand in hand, using the terms interchangeably was misleading. America’s most wealthy individuals don’t necessarily draw the highest levels of income.
For example, while professional athletes, top executives, doctors, and lawyers had reputations for high salaries, their obligations could make accumulating meaningful wealth very difficult. Many wealthy individuals, on the other hand, had never earned an exceptionally large paycheck.
Income vs. Wealth – Different Definitions
I like to suppose of income as the amount of money one receives on a regular basis, while wealth was the length of time that person (or family) could maintain their current lifestyle without receiving compensation for performing additional work.
Why was there such a difference between income and wealth? Earning a steep salary in a high profile job or career generally comes with financial commitments – to get the job in the first place and to preserve a higher standard of living. Some of the major factors are:
- Paying back student loans
- Mortgages, homeowners insurance, domestic improvements, etc
- Spending on children, saving for college education
- Luxury spending and travel
Learning according to Example
To explore the distinction between income and wealth in context, I’ll use two fictional 50-year-old characters: Adam and Bill.
Adam was wealthy, but has never earned a large income. Adam began working at age 22, later earning his bachelor’s degree paying in-state tuition at a state university. Although his starting salary was fairly low later graduation, Adam has managed to live mannered polite below his means. He committed to investing at least 10% of his income, and diligently shunned credit card debt. Through tough work and an excellent reputation, Adam has worked his way to a management position and now earns $60,000 a year.
Adam’s family lives simply, and they’ve remained in their small, three-bedroom house in a working lesson, course neighborhood. He and his wife paid off the mortgage a few years ago. Their children attended public schools, and when the kids grew up and needed cars, they got used cars and paid cash. They may not live a lavish life, but the family was not only comfortable – they’re debt free. And later 28 years of investing 10% of his income, Adam has built up an investment portfolio worth close to $1.5 million.
With a simple annual budget of $45,000, Adam’s family could sustain their current lifestyle for more than 30 years, without Adam or his wife ever needing to work again.
Bill earns a large income, but he isn’t wealthy – at least not yet. Unlike Adam, Bill attended an expensive private university, which, later financing, cost approximately $200,000. Bill was highly intelligent and tough working, and with his stellar record he gained admission to one of the best medical schools in the country, incurring another $200,000 in student loan debt to earn his M.D. After completing medical school, residency, and a fellowship, Bill got a job as a physician, starting out earning over $200,000 per year.
Especially with the consolation of a high annual salary, Bill’s family lives extremely well. He qualified for a jumbo mortgage on a $750,000 domestic in an exclusive gated community, total with a golf course. Bill’s children attend the most prestigious local private schools, and Bill and his wife drive current-model, imported luxury vehicles.
A highly-proficient physician, Bill has worked his way up to an annual salary of $350,000. But Bill’s family’s expenses – the large mortgage payment, payments on two new cars, the children’s private schools, his own student loans, club memberships, luxury clothing, and expensive vacations – add up. The total cost of indulging was equal to Bill’s yearly salary. Some years the end up spending even more than Bill makes.
Bill’s family ends up living paycheck to paycheck, despite his immense annual salary. If Bill were to stop working, his family would soon be destitute.
This example isn’t a knock on the medical profession or the financial habits of physicians, but the amount of debt that many doctors have to take on for school and training certainly tempers the insight of their high salaries. It costs a lot to get to that income level, and decades could pass before a doctor makes more money than the degree cost in the first place. This simplified illustration helps to clarify the differences between wealth and income.
While a high salary could help an individual or family appear wealthy, somebody takes commitment and sacrifice – regardless of income – to attain real monetary wealth. Building wealth does not require a large income; somebody requires a conservative, long-term mindset.
Money Crashers has plenty of tools to help educate you and your family on the best ways to increase your earning potential, reduce debt, and save more money. With a passion for personal finance and the would power to defer your instant desires for fabric possessions, you could build true wealth.
Do you feel you’re poised for wealth despite a mid-level salary? Or do you had some poor disposable income habits that you requiere to get rid of?