Being rich and being wealthy seems to be synonymous as both involves having a lot of money. However, there’s a big difference between the two. If you notice, there are a lot of so-called ‘get-rich-quick’ schemes but there are no ‘get-wealthy-quick’ schemes.
The main difference between being rich and being wealthy is knowledge. Wealthy people know how to make money while rich people only have money. Rich people are motivated by money but wealthy people are motivated by their dreams, purpose and passion. Most rich people make a lot of money with their paychecks but the moment they stop working, they also stop making money.
Being wealthy is defined as that status of an individual’s existing financial resources that supports his or her way of living for a longer duration, even if he or she does not physically work to generate a recurring income.
For example, if a person’s monthly expenses amount to Php 25,000 and he only have Php 100,000 in his savings, his wealth is approximately four months or 120 days. Wealth, therefore, is measured in time, and not in amount of money that you have. It suffices to say that wealth is dependent not only to the amount of income but also to amount of expenses one makes.
Wealthy people can build sustainable wealth that can last for years through asset investments producing multiple streams of income.
Rich people, on the other hand, may get money in an instant such as inheritance or winning a lottery. However, because of lack of proper mindset and poor money management skills, all of it can be lost in a short period of time. It makes sense that if you did not work hard to earn and build it, then it can just easily pass on your hands and splurge it on things which are not important. Some of these people are more commonly known as ‘one day millionaires’. Now they have it, the next time they don’t.
Wealthy and rich people both may experience downfalls and failures in their ventures. However, because wealthy people are knowledgeable when it comes to money matters, they can start all over again and build wealth over time. In contrast, rich people may find it hard to attain what he or she previously has. In essence, wealthy people are financially free while rich people are not.
Since wealth is not an overtime success, one must learn to distinguish an asset from a liability. Focus on creating and buying income-producing assets to generate a passive or a portfolio income.
How Strong is Your Wealth?
Now that you’re on your way in building your wealth, the next thing to do is to calculate and monitor your wealth ratio on a monthly basis to properly administer the financial and economic aspect of your life. The formula is:
The objective of calculating your wealth is to have your passive and portfolio income equal or greater than your monthly expenses. The moment you have a ratio of one is to one or more at any given month, then it indicates that you have increased your financial capacity to live a better life. On the other hand, if your wealth ratio is less than 1, it implies that you are still in a financial dilemma and your cashflow does not meet your basic life standard.
As I have discussed in the 3 types of income, passive income is the residual income that you get from compound interest or compound growth. They come in the form of rental income from real estate properties, residual income from network marketing or franchises, interest from savings and time deposits, income from a virtual assets, etc. Meanwhile, portfolio income comes mainly from paper investments such as stocks, bonds, trust funds, and other marketable securities.
The key in improving your wealth is to regularly monitor and increase your passive and portfolio income by increasing your means to earn more instead of acquiring more expenses. The moment you decide to make the passive and portfolio income a part of your financial habit and discipline yourself in building it, your are on your way to financial freedom. This is the path in maintaining a strong wealth foundation.