Do you know the difference between being rich and being wealthy?
Merriam-Webster defines rich as “having abundant possessions and especially material wealth.”
Merriam-Webster defines wealthy as “having wealth” where wealth is defined as an “abundance of valuable material possessions or resources.”
In the dictionary, the two seem to mean the same thing. “You have valuable stuff.”
In real life, there is a small but very important distinction.
To illustrate this, Chris Rock has a famous joke – “Shaq is rich. The white man who signs his check… is wealthy.”
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Resources: The Difference Between Rich and Wealthy
Rich people and wealthy people both own valuable things (possessions), but the wealthy also own resources. The key difference between being rich and being wealthy is that last bit, that the wealthy own resources. And resources provide cash flow.
Many wars have been fought over resources.
Natural resources are, in part, what makes some nations rich and others poor. Resources are also why some people are rich while others remain poor. When they talk about privilege, it’s about your access to and ownership of resources.
To accumulate wealth, you must accumulate resources. This is why saving your money and investing it is so critically important. Your investments are your resources and they can generate cash flow or increase in value (which can be sold to provide cash flow).
Your Natural Resource: Time
When you are born, you have just one natural resource – your time. ~1 billion heartbeats.
Much like oil trapped deep in the Earth, this non-renewable resource must be processed before it has any value to the outside world.
It must be refined through education, experience, training, practice, and struggle. Only after it has gone through that process does it have value to the outside world. No one will pay a baby to do their taxes.
And your value will fluctuate through the years. You will have peak earning years where you should take advantage of it by working hard. During those good times, you need to save and invest so that your hard work can take care of you in the later leaner years.
You can see this acutely with professional athletes. The window for earning a high income is very short. Very few people have decade-long careers like Tom Brady. The average NFL running back has a career of just a handful of years (and the vast majority of aspiring NFL running backs never make it to the league).
When that career ends, the value of their athletic abilities goes to zero. And this can be a big shock.
This is a big shock when someone retires at 65 too, but at least it’s socially acceptable for a 65-year-old to live a life of complete leisure after retirement.
Sell Time, Accumulate Resources
When you are earning, you must take some of that income and invest it into valuable resources if you want to build wealth. These are those valuable assets that appreciate in value, generate cash flow or both.
If you like the analogy of natural resources, this is like buying a piece of land. The land can generate income through farming (food, wind, solar) or drilling or mining. It can also appreciate. And, of course, it can do both.
You need to accumulate resources so that you don’t have to turn your time into money until you die. These resources can generate cash flow to sustain you once your earning potential has gone down.
And resources give you the ability to weather a retirement by choice or by force because those resources can help pay for your living expenses.
Why Is Being “Rich” So Bad?
Like everything in life, there are levels. Rich isn’t necessarily a bad thing on its own because it’s nice to have nice things. And many expensive products are more durable, more comfortable, and more appealing than their cheaper alternatives.
And it’s your money, you’re an adult, and you should be able to do whatever you want with it.
But when people malign “rich,” it’s about extremes. If you spend your money only on things and do not invest in resources, you will have to sell your time forever if you wish to maintain that lifestyle.
Secondly, the reason lavish spending can be bad is if you do it for the wrong reasons. Many times, we spend on visible lavish things because we are trying to win the status game. Having status can feel great but when it’s based on what you own, it can get very costly too. And I’m not entirely sure what you get when you “win” the status game.
And all that spending does one thing – puts your future self at financial risk. If you have to work long hours, it puts your relationships at risk too.
This is, however, something only you can decide. Someone who makes $6 million a year has a different relationship with spending as compared to someone who makes $60,000.
Someone making $6 million a year can spend $5 million and still be saving $1 million a year.
The trouble with spending is that it’s rarely a one-time event. Whatever you’re buying has a total cost that exceeds the sticker price. When you buy a car or a house, there are substantial maintenance costs. These are costs you have to pay even when your income drops – because the bank doesn’t care whether you’re retired or not.
An Example: Shaquille O’Neal
Everyone wants to believe that professional athletes are financially reckless. And some are. But some athletes are as savvy with their money as they were on the court.
Chris Rock joked that Shaquille O’Neal was rich but not wealthy. Shaq has had NBA career earnings of nearly $300 million (and several hundred more in endorsements). He has parlayed that income into business interests that likely peg his net worth closer to half a billion or more. This is staggering considering he’s also had to pay income tax (in California no less!) throughout that time.
How did he do it? He accumulated resources.
He invested his money in a variety of areas, you can listen to O’Neal talk about it in an interview with The Wall Street Journal:
Shaq has four NBA championships, is a Hall of Famer, actor, and business owner, and seems like one of the nicest guys in the world. The guy is a legend.
How You Can Be Wealthy Too
The key to building wealth has two components:
- Maximize the value of your time (and sell it) – earn as much as you can, by investing in yourself so that you can get the highest amount for your time, and then maximize those peak earning years.
- Save and invest in resources – Invest invest invest!
There are tactical steps you can take to execute this simple two-step plan but the roadmap is pretty clear. You need to turn your time into income-generating assets. Do not the specifics get in the way of the overall plan because the plan is stupidly simple.
For example, when you invest, you may be tempted to wonder about the difference between VOO and VTI or whether you should be investing in passive income (yes, but index funds first). Don’t get distracted about whether you should invest in a Vanguard fund or Fidelity fund (both are great), just get invested.
While it’s extremely unlikely that you will ever be as wealthy as Shaq, you can become wealthy enough to send your kids to the same schools.