In today’s fast-paced world, financial success is often equated with being wealthy or rich. However, there are significant distinctions. While both terms refer to abundant financial resources, the underlying principles and long-term implications differ significantly. As a financial advisor specializing in assisting professionals in the technology industry, I come across many situations where we can differ between wealthy and rich people. In this article, we’ll explore wealthy vs. rich: what’s the difference?
What Does it Mean to be Rich?
Being rich is generally associated with having a high net worth, a lavish lifestyle, and the ability to afford extravagant purchases. People who are rich may have high incomes through a successful career, but it does not necessarily guarantee long-term financial security. It is important to note that being rich often focuses on the present and immediate gratification.
The characteristics of being rich include:
- High Income and Spending: Rich individuals typically earn substantial amounts of money and spend it freely on luxury goods, expensive vacations, and indulgent experiences.
- Material Possessions: Being rich often involves acquiring tangible assets such as luxurious homes, high-end vehicles, and designer possessions that showcase being “rich” and status.
- Short-Term Mindset: Those who are rich prioritize immediate satisfaction and instant gratification rather than considering long-term financial planning, financial preservation, or legacy.
- Reliance on Active Income: Being rich often relies heavily on active income earned through employment or business ventures. Generally, being rich isn’t associated with developing passive income streams from investments where the person can step away without actively participating in generating income.
The Downsides of Being Rich
While being rich may appear appealing, it is essential to acknowledge its downsides, which tend to impact the long-term:
- Lack of Long-Term Security: Because a rich individual tends to focus on high spending, material possessions, a short-term mindset, and reliance on active income, it can lead to a lack of long-term financial security. Failure to invest a high income for future financial security ultimately produces a lack thereof!
- Unsustainable Lifestyle: Without a focus on building sustainable wealth, maintaining an extravagant lifestyle can quickly drain resources, leaving little room to invest for the future. Common issues are spending too much on housing, such as purchasing an expensive home that accounts for more than 30% of your gross monthly income: or purchasing expensive and depreciating assets such as cars. Doing so can be a quick way to ensure that there’s not much left to save or invest every month. Always “budget” your future financial security first and then allocate income for other expenses within your control.
- Limited Impact: Merely being rich does not necessarily equate to making a lasting impact or leaving a legacy. Generally, a rich person is allocating their high income towards material possessions, which makes it harder to develop a legacy through business formation, community impact, or charitable giving.
What Does it Mean to be Wealthy?
In contrast to being rich, wealth is a more comprehensive and enduring concept. It encompasses not only financial abundance but also a holistic approach to managing resources, preserving wealth, and creating a secure foundation for the future.
Key attributes of a wealthy individual include:
- Financial Independence: Wealth provides individuals with the freedom to make choices and pursue opportunities without being solely dependent on active income. It enables the creation of passive income streams through investments, real estate, or business ownership. Achieving financial independence is a long-term goal for most people. However, achieving it all starts with developing the proper financial habits and mindset.
- Long-Term Mindset: Building wealth involves setting long-term financial goals, creating a robust financial plan, and implementing strategies focusing on accumulating assets and preserving capital. The process of financial planning is dynamic, and as our client’s goals change, we can help navigate the choices in front of them to ensure they’re confident in their decisions and maintain a “wealthy” mindset.
- Diversification: Wealthy individuals understand the importance of diversifying their investments to minimize risk and maximize returns. They consider a variety of asset classes, such as stocks, bonds, real estate, and alternative investments, to build a well-rounded portfolio. Generally, this means diversifying away from concentrated stock positions that many of our clients accumulate from equity compensation and creating a “rules-based” approach to their investment strategy. For example, a “rule” may be no single equity position may take up more than 10% of the portfolio, which takes the emotional aspect out of making the investment decisions, which can be one of the more detrimental impacts on an investor’s portfolio.
- Generational Wealth: Wealth goes beyond an individual’s lifetime. Wealthy individuals strive to leave a legacy and create a lasting impact by building generational wealth to benefit their families and future generations. For example, they may develop a legacy around philanthropy and involve family members in charitable giving by forming a donor-advised fund or private charity. Or, it may include “super-funding” 529 plans for children or grandchildren that ensure they have funds available for high-quality education.
The Advantages of Building Wealth
- Financial & Mental Security: Wealth provides a safety net during economic downturns, unexpected expenses, or life transitions. It offers peace of mind, knowing that you have the resources to handle unforeseen circumstances without compromising your financial stability.
- Lifestyle Flexibility: Building wealth allows for more flexibility in life choices. It provides the freedom to pursue passions, take risks, and make career changes without being solely driven by financial necessity. Oftentimes, we have clients who have built meaningful wealth, take long sabbaticals from working entirely. It could mean they’re traveling, picking up a new hobby, starting a business, or simply laying low to recharge.
- Legacy and Impact: Wealthy individuals often prioritize making a meaningful impact on their communities and society. They can contribute to charitable causes, support philanthropic initiatives, and leave a lasting legacy beyond their wealth.
- Option to Live Rich: Coincidentally, once an individual or family has achieved wealth they have the option to live a “rich” life. The foundation upon which their wealth was built can provide a lavish lifestyle. It could mean purchasing their dream car, vacation home, or luxury material goods. However, in contrast to being rich first, becoming wealthy first can then provide a rich life while still maintaining all advantages listed above.
How Tech Professionals Can Build Wealth
For professionals in the technology industry, particularly those with equity compensation, there are specific strategies to consider when aiming to build wealth:
- Maximize Equity Compensation: Understand the intricacies of your equity compensation packages, such as stock options (ISO’s and NQSO’s), restricted stock units (RSUs), or employee stock purchase plans (ESPPs). Develop a strategy to diversify and monetize these assets effectively. Oftentimes, detailed tax planning is essential in addition to a “rules” based investment approach. Failure to plan for any tax implications of equity compensation can lead to unfortunate situations.
- Prioritize Savings and Investments: Establish a disciplined savings plan and allocate a portion of your monthly income towards long-term investments. Creating a habit and mindset of “paying yourself first” will have a compounding effect on building wealth. A great rule of thumb is to set aside at least 20% of gross income towards your long-term investments. Generally, this will lead high probability of achieving financial independence in the future.
- Diversify Your Portfolio: Look beyond the technology sector and diversify your investment portfolio. Explore opportunities in different asset classes, such as real estate, public equities, and alternative investments. Diversification helps mitigate risk and increase potential returns.
- Plan for Tax Efficiency: Understand the tax implications of your equity compensation and investment decisions. We’re detailed tax planners, and almost all financial decisions have some tax implications. Ensuring you make tax-efficient decisions is essential!
- Focus on Education and Skill Development: The technology industry is constantly evolving. Continuously upgrade your skills and knowledge to remain competitive in the field. This can lead to career growth, higher income potential (and therefore higher saving/investing potential), and increased wealth-building opportunities.
- Create a Comprehensive Financial Plan: Develop a holistic financial plan that encompasses short-term and long-term goals, retirement planning, risk management, estate planning, tax planning, and cash flow advice, to name a few areas of a comprehensive plan. Regularly review and adjust your plan as your circumstances evolve. We work with our clients on an ongoing, dynamic basis. As your life and priorities change, so should your financial plan.
The Bottom Line
Wealthy vs. rich is a difference between focusing on the long-term, not the short-term, accumulating appreciating assets rather than depreciating assets, and dedication to the planning process compared to failure to plan. Nothing in life worth pursuing or achieving is easy to come by; it will take hard work, dedication, and focus to build wealth ultimately. But it doesn’t mean the journey in doing so cannot be enjoyable as well. Pursuing a career you enjoy and can thrive in, automating savings and investments, and avoiding large financial mistakes can coincide with living a great life today. While also setting the foundation for achieving wealth in the future.
If you aspire to live a rich life, consider setting the foundation to build a wealthy one first. In doing so, you’ll be able to achieve both. Schedule a free consultation today.