Income and wealth are two very different things.
Lesson #1: Income is no good if it can’t be turned into wealth
Income is what you get paid in the hand. It could be from your job, your investments or your savings. Income can create wealth if used wisely, but income does not make you wealthy. It’s how you use it. Saving does. That is why someone on a high income who spends it all can be much worse off than someone on a low income that does save and invest.
The high-income earner may look wealthy by buying fancy cars, dinners and trips. But if their money is not used for savings then they will never be wealthy. They are just bigger spenders! Do not conflate wealth and income. Outside looking in they may look the same, but they are not. Heck, even many media outlets make the mistake of equating wealth with income with articles comparing high income to high wealth.
If you are middle income you can still be wealthy and if you are high income you can have no wealth.
No doubt it is harder to be wealthy for low and middle-income earners. They need to be much smarter and more deliberate with their spending decisions. That’s why it’s so important for middle income earners to stop trying to act rich, and be rich. Not inflating your lifestyle with increases in income will go a long way towards wealth. It is a long game too.
For anyone who has been reading the blog for some time, you know how I feel about wealth and money. The best thing I think money can buy is freedom. The freedom of choice to spend your time as you please. On things that bring you joy.
Lesson #2: Wealth is no good if it can’t be used as income
It’s not just enough to be wealthy though. Just look at the recent backlash over the proposed Greens tax bill. Many Aucklanders in particular, rightly or wrongly, claimed that $1 million is not wealthy. In other words, a paid off house but not much more. To them, $1 million is not much because it is all in their house. It can’t easily be used as income or to provide a lifestyle without income. I’ve even written about this before.
You need to ensure your financial plan allows for an annual income that will sustain your lifestyle long after you stop earning an income from work. Even though you may be wealthy, you won’t much feel like it if your wealth can’t easily be turned into income.
Too much house as a proportion of overall wealth is a common occurrence in New Zealand thanks to high house prices, people’s desires to buy as much house as they can afford, raiding our Kiwisaver retirement funds for purchasing houses, and the classical advice to pay off your mortgage as quick as possible. This has meant not much in savings and investments outside of the house. You need to think how you are going to fund your retirement and turn your wealth into income.
Wealth on its own is not always enough.
Income and net worth are related, but they are not the same. Each can be used in their own way to assess your overall financial progress. One on its own though, does not mean the same for the other.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here