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The Difference Between Wealth And Income

It's important to make a distinction between income and wealth.

- Income is a "flow" number.

- Wealth is a "stock" number.

Wealth can generate income, and *should* generate income. Income usually starts out by you renting out your time. As time goes on, the goal is to eventually rent out your capital (returns generated from stocks, bonds, other) or your assets (renting out real estate).

1% income vs. 1% wealth

A person inside the top 1% of income isn’t always inside the top 1% in terms of wealth. For example, a young 20-something consultant, banker, or other services professional can sometimes earn a lot - a few are inside the top 1%.

But they are unlikely to be in the top 1% of wealthy people as they haven’t had enough time to compound. This is also the stage in life where they often have a lot of debt from student loans, a car loan, then a mortgage. The net worth of most people at this part of their lives is negative. They have to acquire education to make the money, they need a mode of transportation, and they need a home. This is often very expensive and can take 10-20 years to dig out of.

There are a lot of wealthy mid-income people and loads of people inside the top 1% who live paycheck to paycheck. Many making six or seven figures are broke because they gave in to lifestyle inflation or took on too many homes, cars, etc.

Making "1% money" - $329,000 per year in the US in 2019 - gives you the choice to afford some really nice homes and cars. That doesn't mean you should though.

And just as there are many making 1% kind of money who are broke, there are many earning that amount but live otherwise normal lives.

The importance of mentality

There are some common features that we can observe when it comes to the top 1% in terms of wealth (but not necessarily income).

Those include:

1. More likely to care about the future, think long-term, and delay gratification. High-income, low-wealth are more likely to be "in the moment" and less likely to think about the future. And also less likely to think about the risk of everything falling apart, such as losing your job or having an unexpected expense come up. When you focus on saving and investing first and build a nest egg where money is no longer your primary focus, you can handle these periods without the stress of having to worry about affording any emergencies.

2. They are more willing to take calculated, smart risks. When you're more focused on winning than losing you have a lot of power. If you're constantly "broke" or have too thin of a margin for error, you can't make the type of long-term decisions that would set yourself up well.

3. They're more likely to understand the value of time. We all have the same amount of time in a day. And time is your most valuable resource. Once it's gone, it's gone. Even though wealthy people are frugal in some or many ways, they will be willing to invest money into something that's likely to directly or indirectly provide a good return on investment, even something like freeing up their time.

4. They are less likely to think - "what can money earn me today" and more toward "what can money start earning me or in the future"?



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