Blog | Personal Finance

What is the Difference Between Being Rich and Being Wealthy?

There’s a huge difference between being rich vs wealthy. Ultimately, the choice is yours.

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Summary

  • Most people don’t know the difference between rich vs wealthy

  • Your Wealth Number is a clear indication if you’re rich or wealthy

  • The path to wealth can make or break your retirement


The difference between rich vs wealthy

A common misconception people have about being rich vs being wealthy is that they are ultimately the same thing.

When Robert Kiyosaki was a young boy, his rich dad told him about the difference between being rich vs being wealthy.

“Many people think that being rich and being wealthy are the same thing,” said rich dad. “But there is a difference between the two: The rich have lots of money but the wealthy don’t worry about money.”

What rich dad meant was that while being rich might mean you have lots of money, you also might have lots of expenses that keep you up at night. These could be expenses like your mortgage, your car payment, credit cards, private school tuitions, and more. In short, if you’re rich, you’re often trying to keep up with the Rat Race. (The Rat Race is a horrible place to be, which is why my board game, CASHFLOW® is designed to help you get out of it). Often if you’re rich, you have a high paying job to pay for the Rat Race, and you have to get up to work every day. You probably also have a fear of getting fired or laid off.

Being wealthy means you don’t have these worries. Why? What’s the difference?

Most people do not understand what it means to be truly wealthy. In fact, most people have confused being wealthy with being rich, that is, having lots of money to spend but no real financial independence.

The definition of being wealthy

There are countless ways to define the word “wealth.” A brilliant inventor, philosopher, and humanitarian named R. Buckminster Fuller defined it as such: “Wealth is a person’s ability to survive X number of days forward.”

In financial terms, this translates to the questions, “How many days could you survive if you stopped working today? How long could you survive on the amount of money you have?”

These are difficult questions for people to ask because most people don’t have enough savings and assets to survive for more than a few months. Some may only have a few weeks. Truly wealthy people, however, those who have achieved financial freedom, have assets that provide cash flow (passive income) month in and month out, that cover their living expenses and often much, much more.

If they so choose, those who are financially free never have to work a day again in their lives. Their assets provide enough cash flow income to cover their expenses. And that, is the very definition of wealth.

Use time, not money, to calculate how much you need to be financially free

Rich dad said, “Rich is measured in money, and wealth is measured in time. Most people focus on getting rich rather than becoming wealthy.”

Instead of measuring your wealth in terms of money, it's better to measure your wealth in terms of time — what we call the Wealth Number.

The two-part question to discover your Wealth Number

In terms of discovering your Wealth Number, there are two important parts to the question, “If you (or you and your partner/spouse) stopped working today, how long could you survive financially?”

  1. If you stopped working today…
    That means there are no more paychecks coming your way. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.
  2. How long could you survive financially?
    We’re talking about survival at your current standard of living, not if you downsized your house, sold your car and rode the bus, stopped eating out, and so forth. Given your current level of expenses, how long would your money last?

The path to becoming wealthy: defining your wealth number

What’s the path to becoming wealthy? Here’s how you define your Wealth Number.

Defining terms

For our purposes in calculating your Wealth Number, your money consists of your savings, CDs, retirement accounts, liquid stocks (stocks you could sell today), physical gold and silver you have in your possession — it can include anything that can be converted into cash today. It does not include selling your jewelry, your furniture, or your second car, for example, because that would lower your current standard of living. It does include cash flow from dividends, rental real estate, and other investments that produce income without your effort.

You’ll also need to determine what your monthly expenses are. Note: It’s easy to lie to yourself about how much you actually spend on monthly expenses — so pull out your bank and credit card statements and look at the average costs of everything over the last three months. Be sure to include all your expenses, because you want to expand your financial means to meet the lifestyle you desire, not live below that lifestyle.

Even if you have done this calculation for yourself before, do it again now. Why? Your finances are dynamic; they are continually changing. You may come up with a similar answer, or you may be surprised by your new outcome.

Do the math

Once you know your total monthly expenses and your sum total of money available, you can determine your wealth by dividing your total sum of money available by your monthly expenses. Here's the formula:

Your available money / Your monthly expenses = your wealth number

Once you do the math and divide how much money you have available by your monthly expenses, you end up with your wealth number. What does that mean? Your Wealth Number is measured in time—in this case, in months.

For example, if your total amount of money is $25,000 and your total monthly expenses are $5,000, then you divide $25,000 by $5,000 and you get 5. This is your Wealth Number. It means that you could survive for 5 months on the money you have currently available without working.

So if your Wealth Number is 24, that means 24 months. If your number is 6, that equates to 6 months. So, this calculation will reveal the exact number of months you could survive if you (or both you and your partner) stopped working today.

So, what’s your number?

Accepting reality

For most people, this calculation is sobering. It brings you and your money face to face. It is the most realistic and telling demonstration of exactly where you stand today financially.

For a lot of people, their Wealth Number is 3 or less. That means they could only survive without paychecks for three months or less. They are pretty much living paycheck to paycheck. Some actually have a negative number, which means they are spending more every month than they are bringing in.

It really doesn’t matter what your number is. Your number is simply your number. You don’t need to make it right or wrong or continually stress over it. It is what it is. Period. Now you know something that most people will never take the time to figure out. And most importantly, now that you know, you can take action and change it if you choose.

Understanding the two retirement philosophies

Now, incorporate your Wealth Number into your retirement plans.

There are two ways to think about retirement: the traditional way and the Rich Dad way.

The difference between the Rich Dad philosophy and other financial philosophies and strategies is that most financial planners, experts, spokespeople, and journalists plan on two things happening upon your retirement:

  1. You will have a fixed amount of money to live on that earns you a small amount of interest, and;
  2. You will have a lower standard of living during retirement than when you were working, due to the loss of a salary or paycheck and rising medical expenses as you age.

The Rich Dad philosophy does not make those assumptions. Instead we assume:

  1. You have passive income coming in every month that equals or exceeds your living expenses… forever. In other words, you never have to worry about running out of money once you retire or stop working, and;
  2. Your standard of living remains the same or, in many cases, increases. That is why we calculate the Wealth Number. Imagine being 70, 80, 90, or 100 years old and knowing you are just about out of money…horrible.

How do you define wealth?

So, take a look at your finances. Are you rich or wealthy?

If you are unhappy, or even upset and sad, about that number in front of you — good. If it brings you angst when it comes to your retirement, even better. That just means it’s time to take some action. Consider enrolling in a free education workshop to learn how to build streams of long-term cash flow, or explore some free tools to help increase your financial intelligence. It’s never too late to start making some changes that will enhance your future.

Original publish date: July 24, 2018

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