While wealth and income have been used interchangeably in the American culture. They are two different things and they should not be construed to mean the same thing.
Granted, income and wealth may often go hand in hand, but taking them to mean the same thing is misleading as it will be shown in this article.
The difference between wealth and income can be demonstrated by looking at the lifestyle of top executives, professional athletes, lawyers, or doctors.
All these people have high incomes; however, their lifestyle demands high spending.
This makes it difficult for them to accumulate wealth. On the other hand, many wealthy individuals do not earn high paychecks, but they have invested in income generating assets.
Earning a huge income does not always lead to wealth creation. In many instances, those earning high incomes tend to have a high standard of living.
This forces them to spend more money than those who have low incomes. Being wealth depends on how you manage your income.
You can receive income in terms of salary, profits, wages, interests, rents, and any other form of earning. Income is what you earn and you may spend it on consumables or you can save it as an investment to create wealth.
Wealth is the total value of capital and assets you own minus your liabilities while income is the regular earnings you either get from your investments or as a payment for services rendered or sales made.
Illustration of the Difference between Income and Wealth
To illustrate the difference between income and wealth, I will use two fictional characters James and Jacob both at 50 years with two different life paths.
James’ Wealthy-Driven Lifestyle
James is wealthy, but all his life, he has earned an average income. James started working at the age of 20, after completing his undergraduate degree at a state university paying instate tuition.
James started out with below average income, and he has managed to live below his means.
With a good financial acumen, James decided to invest at least 10 percent of his income, and he avoided any credit card debt.
In addition, James’ hard work and diligence have earned him a promotion to management level position where he is earning a yearly income of $70,000.
James has a family. He is married to one wife and they have two kids –a boy and a girl. They got married when James was 22 years old and they have lived together since then.
James’ family have a simple lifestyle. They own a three-bedroom house that they just completed paying off the mortgage some few years back.
They took their kids in a public school, and when the kids reached the driving age, they bought them used cars –they paid in cash, no credit.
While James family does not live a lavish life, they have a debt-free and comfortable life.
Moreover, after investing 10 percent of his income for 28 years, James has built an investment portfolio of almost $1.6 million.
James family annual budget is close to $46,000.
This means they can sustain their current lifestyle for over 30 years if they did not have any other source of income.
It is safe to say, therefore, that James’ total wealth is $1.6 million.
On the other hand, we can look at Jacob, a highly paid executive.
Jacob’s Income-Driven Lifestyle
Jacob has a large income, but he is not wealthy.
In contrast to James, Jacob went to an expensive private university, which was financed through a student loan of $200,000.
Jacob is a hard working individual and he is very intelligent. He has maintained a stellar record that has gained him admission to a respected medical school in the country –this costed him an additional $200,000 in student loan.
After completing his training, he was employed with a starting annual salary of $200,000.
Jacob is married with two kids – two boys. With the comfort, a good salary, Jacob’s family lives a good life.
Jacob is still paying off his $750,000 mortgage for a house in an exclusive gated community, with high-end amenities like a golf course.
Jacob’s kids attended high-end private schools in the country, and Jacob and his wife have each the current models of imported luxury cars.
Due to his diligence and hard work, Jacob has worked his way up the industry and is now earning $360,000 yearly income.
However, Jacob’s family expenses have increased. With the mortgage repayments, car loans deduction, the children’s private school tuition fee, club membership fee, his own student loan repayment, expensive vacations, and the luxury clothing, Jacob’s annual income is barely enough to break even.
In some instances, Jacob has to use his credit cards to pay for some of his expenses. This leaves him with very little to save or invest.
Currently, Jacob lives from paycheck to paycheck and he is only one missed paycheck away from poverty.
Now in the eyes of those who see his lavish lifestyle, he is a wealthy man, but in reality, he is not.
He just has a large income stream that keeps him afloat, able to cater for his recurrent expenses.
Wrapping It Up
In summary, wealth can be defined as the total assets minus the liabilities an individual has. You can be said to be wealthy if your total wealth is able to sustain you for a given period without having to work.
On the other hand, an income can be defined as the stream of finances that is paid to you regularly.
You can create your wealth using your income by saving and investing a percentage of your income. Conversely, your investments (which can be regarded as part of your wealth) can generate some income for you.
Everyone wants to be wealthy. However, wealth creation is a lifestyle and a mindset. Without this type of mindset, it is difficult to create wealth from the years of your work.
Wealthy people tend to live below their means and they invest part of their income with an aim of earning some interest/rent from it in the future.