There is that misconception around the poor and middle class that when you have a lot of income, you are rich. Having a lot of money and being wealthy is not the same thing.
Moneywise, being rich means having a lot of money. This definition does not talk about expenses and liabilities. A middle-class worker with an income of $30 000 per year can be wealthy, whereas a doctor with an income of $200 000 per year can be far from being wealthy.
Before trying anything with our money, we got to ask ourselves this question first:
What does “wealthy” mean?
There are four important personal finance concepts that everyone must understand:
We must understand exactly what they mean to truly understand what is wealth.
Here are the simplest ways I can describe them:
Example: Your job paycheck, dividend deposits, a YouTube channel income deposit…
Example: Rent, eating out, cell phone bill, internet bill, electricity bill, well yeah, almost everything ending with “bill”…
Something you own that produces income without requiring your physical presence or time.
Example: Stocks, Bonds, Options, Real estate…
Something you own that produces expenses.
Example: Car loan, Student loan, Mortgage…
We often hear from the middle-class the following: “My home is my biggest asset”. Most of the time, this statement is wrong. In most cases, it is their biggest liability, because it does not produce an income. It can be an asset in a few scenarios:
- If they sell with profit, but it is still a liability until they sell
- If they rent the house, but the rent must generate more than the combined costs of owning the property
The most important concept of them is the third one. The asset.
Now that we know the meaning of each of these concepts, here is the meaning of being wealthy:
You are wealthy as soon as the income produced by your assets is greater than the sum of your expenses and the produced expenses from your liabilities.
In other words, you could stop working and the income generated by your assets would cover your cost of living. Once you reach that point, you became wealthy.
If we take a look back at our middle-class worker and our doctor mentioned earlier. No matter what is their job income, it all depends on the balance between their income, expenses, assets, and liabilities. Most of the time, the doctor will have a lot of money, but tons of expenses and liabilities, causing them to be “rich slaves” to their cost of living instead of wealthy.
So here is the rule of thumb to become wealthy:
Spend your whole life buying assets and watch your expenses and liabilities so they stay balanced.
If you want to know more and master these concepts, I strongly recommend taking a look at the book “Rich dad poor dad” by Robert Kiyosaki, available here on Amazon: http://amzn.to/2BL1RjT