Rich Vs Wealthy: Is There A Difference? (1)

When I was younger, I thought I wanted to be rich, only to discover that in fact what I wanted was to become wealthy.

So what’s the difference?

Obviously, the terms rich and wealthy are often used interchangeably. You may have heard the term “stinking rich” as opposed to “stinking wealthy”, so maybe the wealthy just smell better? Who knows?

But let’s go a bit deeper…

Some believe that wealthy people know how to make money — while rich people only have money.

For example, someone wins the lottery or comes into an inheritance will become rich, but may lack the knowledge and skills to even hang on to their money — let alone grow it. There is a list of people a mile long who had sudden riches thrust upon them, hitting the wall soon afterwards.

In 1985, Will Smith teamed up with DJ Jazzy Jeff to produce what would turn out to be a multi-platinum album in 1989. Smith became a millionaire almost overnight, and went on a spending spree.

But the Internal Revenue Service (IRS) soon came knocking, handing Smith a $2.8M tax bill. Smith had to sell practically everything and agree to pay the IRS 70% of his future earnings until his debt was repaid. As luck would have it, he then landed the gig on The Fresh Prince of Bel-Air and managed to pay off his tax debt in around 3 years. He has of course since gone on to even bigger stardom over the years.

Mike Tyson earned over $400M over the course of his 20 years in the ring. However, his earnings didn’t last very long, with Tyson filing for bankruptcy in 2003.

And rapper MC Hammer earned an estimated $33M in 1990. By 1996, Hammer had filed for bankruptcy protection with at least $10M of debt. Apparently, employing 200 people to work in his mansion was not such a smart move.

Unlike these examples, wealthy people understand how money works and how to create it, even if they lose it all. There is no shortage of wealthy bankrupts who came back stronger than ever after losing it all.

For example, Henry Ford went bankrupt twice before building the Ford Motor Company. Walt Disney’s first company was an animation and film studio in Kansas City that went belly up in 1921. Steve Jobs, who co-founded Apple at age 21 and was worth millions by age 23, was then sacked from his own company by his board at age 26. Even President Donald Trumpwent bust in 1990, following on from former US President Abraham Lincoln, who filed for bankruptcy in 1809.

I have heard others argue that rich people believe that money is the reward for working; whereas wealthy people see money as simply the byproduct of following their dreams, purpose and passion.

But for mine, the major difference between being rich and being wealthy is time.

That is, how long would your money last should you stop working today? You might be on a high income, for example; but if you stop working, how long will your wealth last you?

So for rich people, it might be measured in months or years, whereas wealthy people would answer in decades or even centuries.

The trick to becoming truly wealthy then is in converting the income you produce over the course of your working life into as many high-quality assets as you can acquire.

See, if you have a number of high performing assets capable of generating a serious income for you, work becomes a choice, not a chore. In other words, you stop trading your time for money, and instead have your assets making you money and therefore freeing up your time.

And for mine, I know of no better asset class than property — for a whole bunch of reasons.

Here are just three:

• Residential property is the largest asset class in Australia and is close to $7 trillion in size. That means more people hold more of their wealth in property than any other asset class — and let’s face it, everyone needs somewhere to live, so this demand is not going away anytime soon.

• Banks love property! That is evidenced by the fact that it’s still possible to leverage property to up to 95% of its value in some cases. That means if I have $50K to invest and the serviceability to borrow $950K, I could end up controlling an asset worth up to $1M. Perhaps it might help to think of it like this: if that property doubles in value in 10 years — and the loan amount remains unchanged — my $50K has just turned into $1.05M. Or the equivalent of an extra $1M over 10 years. Imagine earning an extra $100K p.a., or a 200% p.a. return on your original $50,000 investment? Now that is powerful…and largely passive in nature! Now imagine having a whole bunch of these high performing assets in your portfolio…

• The ability to add serious value to property. This can come in the form of renovation, subdivision, development, rezoning, etc. In fact, property is one of the few asset classes where you can apply your knowledge, skill and experience to increase its value so readily.

Again, there is no substitute for experience! It certainly takes time to learn how to acquire high-quality, property-based assets through all market conditions.