What is the difference between the rich and the wealthy?

luxury label. expensive car. A vast mansion. We’re used to thinking of these things as symbols of wealth, but visuals can be misleading. Prominent billionaire investor Warren Buffett drives a 10-year-old car and lives in the same house he bought in 1958 for less than $32,000, which when adjusted for inflation is only about $329,000. is.

A person with a multi-million dollar fortune may be wealthy, but he or she may not be wealthy. On the other hand, extremely wealthy people may not appear that way to others. Although the terms “high net worth” and “affluent” are often used interchangeably, they actually refer to completely different populations.

The wealthy and the wealthy: how do experts define them?

As of 2022, the average personal income in the United States was $59,430, but the top 1% earned significantly more.

According to the Economic Policy Institute, to be considered part of the top 1%, you need to earn at least $421,926. However, the average income of this group is over $1.3 million, showing how wealthy this group is.

However, while all of the 1% are wealthy by objective standards, not everyone in that group is considered wealthy.

“When someone is considered wealthy, we define them as someone whose current income is more than their fixed costs and who are able to live a lavish lifestyle,” said David Morgan, managing partner at Wealth Advisory. It is classified as “.

“Wealthy people have assets that are greater than their liabilities, and those assets can generate enough income to cover their fixed costs.”

Many factors affect wealth, but it’s important to be aware of the distinct differences:

source of income

There are many ways to get rich. You may inherit money, win the lottery, or get a high-paying job. But that source of income doesn’t pay forever. Eventually, you will run out of money or retire, and your resources will be depleted.

True wealth is all about sustainability. Whether they come from generational wealth or are completely self-made, wealthy people tend to have investments and assets that continue to generate income for years or even generations.

assets

If you are wealthy, you may purchase current or depreciating assets. For example, you might buy a luxury sports car or designer clothing. You can afford to buy something expensive, but the purchase does not generate income and may lose value over time.

In contrast, wealthy people tend to think long-term.

“Wealthy people make financial decisions based on their own set of values ​​and goals,” says Kelly Palmer, certified financial analyst and founder of The Wealthy Parent. “Wealthy people have worked hard to give their lives the most purpose and fulfillment, but if you don’t make decisions that align with your values, you’re harming yourself in the long run.” I understand that it is possible.”

If their focus is on philanthropy or leaving a legacy for their families, wealthy individuals are likely to invest their funds in real estate, the stock market, or other money-generating endeavors to achieve those goals. It will be expensive.

debt

Even if your income is in the top 1%, you may be living beyond your means. It may be difficult to imagine spending in excess of such income if your income is nowhere near the 1% threshold, but it is surprisingly common.

Rich people, or people with high incomes, often stretch their budgets to the max, buying expensive homes and cars, and taking extravagant vacations. You often end up taking out a loan or credit card to finance your purchase, and that debt can become a burden.

Wealthy people tend to prioritize paying down debt to maintain financial security. And when you borrow money, it is usually used to increase your subsequent income. For example, wealthy people may use debt to invest in real estate or small businesses.

longevity

Being rich is not a guarantee that you will always have money, and that issue can affect how you handle money.

“Wealthy people enjoy the moment, knowing it may not last long,” Morgan says. “Wealthy people are enjoying this moment, knowing that as long as they don’t touch their core assets, it will last for generations.”

Being wealthy is temporary, but wealthy people tend to think long-term. They may focus on how to preserve wealth for generations to come, so their spending and investment habits often reflect those goals.

Beyond Rich: 5 Steps to Building Wealth

Is it possible to build lasting, sustainable wealth even if you weren’t born rich? Experts say so.

“Most of my clients didn’t start out with an inheritance or business ownership,” Morgan says. “Often they gain experience in a corporate organization, pay their dues, and then either stay and climb the corporate ladder or leave to use the skills they learned to start a business.”

To establish wealth, follow these steps:

1. Live within your means

Many people in the United States live on a very small budget. According to a recent study published by PYMNTS and LendingClub, 64% of consumers live payday to payday. This also applies to high income earners. 51% of people who earned more than $100,000 said they were also living paycheck to paycheck.

Living within your means and having the ability to save is essential to building wealth. To keep track of your spending, create a budget and look for areas you can cut or eliminate. Some of the wealthiest people make drastic changes to increase cash flow, such as renting out part of their home, downsizing to a smaller apartment, or moving to a one-car household. Some people did.

2. Save for emergencies

Even if you’re wealthy, a major emergency or job loss can wipe out your account. According to the Federal Reserve, 37% of adults can’t cover a $400 expense with cash, savings or credit cards and won’t pay it off in full by the statement deadline.

Most experts advocate setting aside enough money in an emergency fund to cover three to six months’ worth of expenses. It may take time to reach that goal, but the peace of mind it brings will be worth the wait.

3. Invest

Investing is important because wealthy people know that inflation can erode the value of their money. The US Securities and Exchange Commission (SEC) reported that the stock market’s average annual return is approximately 10%.

Investing in the market instead of stashing cash in bank accounts or liquid assets can help preserve wealth and generate additional income.

4. Secure your retirement funds

High-income earners who live a life of luxury may be in for a tough surprise in retirement.

According to a recent study, the median retirement savings for people between the ages of 55 and 64 is $120,000, which would generate about $1,000 per year over 15 years. Even considering Social Security payments, which average $1,791 per month, that level of retirement income is unlikely to be enough to survive.

By saving for retirement as early as possible, you can preserve your assets and retire with peace of mind. A general rule of thumb is to save 12% to 15% of your income. However, if you start contributing to retirement later, you may need to increase that percentage.

5. Increase your income

For many people, building wealth requires increasing their income. Increasing your earnings means you have more cash available for investments and other income-earning activities, allowing you to build a permanent income stream.

You can increase your income by working hard and getting a raise at work, learning new skills and changing jobs, starting your own business, or starting a side hustle. Whatever you do, having a plan to increase your income will make your money work better for you over time.

“Focus on increasing your income as needed to reach your goals, but always revisit your values ​​and determine if you’re working too much,” says Palmer. “Wealth is a feeling, and if you put in the hard mental effort, you will know when you have it.”