Everyone says they want to be rich. However, what people really mean is that they want to be wealthy, they just don’t know it. You see, there’s a difference in being rich vs wealthy, and choosing one over the other matters.
The key to building wealth isn’t a desire to become rich. In fact, it’s quite the opposite. Because while “big ballers” talk about being filthy rich and blowing cash, smart people are quietly building sustainable wealth in the background. This is due to the fact that true wealth is created using three distinct strategies.
Rich vs Wealthy
To help you build wealth the right way, this article discusses the differences between “rich” and “wealthy,” as well as the three things you absolutely must do if you want to become wealthy. If you already understand why it’s important to be wealthy over rich, you can jump right down to the section on the keys to building wealth.
This is What it Means to be Rich
The dictionary defines “rich” as having a lot of money or possessions. This means that a person is typically considered rich if he or she has a lot of money. However, people can also be considered rich if there’s a perception that they have a lot of money. Therefore, the idea of becoming “rich” is a unmeasurable threshold based on some undefined level of monetary assets.
When a person says they want to be rich vs wealthy, what they’re really saying is that they want to spend a lot of money. They want to flaunt their “abundant possessions” and “material wealth” so everyone knows how much cash they have (or pretend to have). And that’s all that being rich really is: abundant material possessions.
And you can get access to abundant material possessions that without even having much money. All you have to do is lease a Porsche for a few hundred bucks a month, and boom, you now look like you’re rich. Which means that you are rich, in a sense. There’s no quantifiable threshold for being rich. As long as someone perceives you to be rich, you are (in fact, a lot of people you think are “rich” probably don’t have much money at all).
Now, wanting to become rich might not sound like a bad thing, and quite frankly it’s not. Trust me, I want a Porsche as much as the next guy. But if you’re trying to build wealth, wanting to become rich is not the way to do it. This is because the act of being rich is literally the act of losing money.
For example, many of the assets a rich person invests in are depreciating, and the majority of the money they spend doesn’t return its monetary value. At the end of the day, being rich is based on some external need for validation. It’s about making – and spending – a quick buck, rather than creating lasting wealth.
This means that being rich isn’t sustainable, and that if we’re trying to achieve financial freedom, it’s lasting wealth that we all really want.
This is What it Means to be Wealthy
The dictionary defines “wealth” as an abundance of valuable resources. When people talk about building their wealth, what they’re saying is that they want to build or invest in a set of appreciating assets. Unlike being rich, becoming wealthy is the act of creating sustainable cash flows rather than spending money on material possessions.
The definitions of both rich vs wealthy contain the word “abundance.” But while becoming rich is the act of spending money on material abundance, becoming wealthy is the act of using existing resources to create new resources. This means that people who become wealthy don’t invest in motor vehicles, but rather investment vehicles that appreciate in price as well as pay dividends.
Achieving wealth status is therefore much more definable than achieving the status of rich. Typically, someone is considered to be “wealthy” when they have enough cash or cash flow to stop working. Doesn’t that sound much better than being rich? Wealthy is sustainable. Rich is not sustainable.
For example, calculate your monthly expenses. If you have enough passive cash flow to cover those expenses or if you have enough cash in the bank to cover your (monthly expenses) x (12 months) x (number of years left in your life), then congratulations, you’re wealthy!
But for many of us, the decision to become wealthy and quitting our jobs is more of a pipe dream than it is a potential reality. However, this doesn’t mean that building wealth is impossible. In fact, becoming wealthy is as easy as 1-2-3. All it takes is a shift from wanting to be rich vs wealthy and a focus on investing in appreciating assets.
Keys to Building Wealth the Right Way
Rich people spend money on material possessions. Wealthy people spend money on assets that generate more money. In a sense, rich people work so they can blow their money while wealthy people have their money work for them. The key to building wealth, then, is to create a diversified pool of assets that reduces your risk and increases your passive return.
Overall, there are 3 different types of assets – known as the “pillars of wealth” – that’ll help you achieve just that. To help, read below to find out how to invest in assets that’ll help you build wealth the right way.
1. Invest in Public Debt and Equity
The “easiest” and best way to start building wealth is through public debt and equity. Public debt come in the form of corporate or government bonds. Public equities are all the stocks you can buy on the NYSE or NASDAQ. When building wealth, it’s important to invest in a diversified portfolio of public debt and equity.
This is considered easy because public investment vehicles have the most data available. Further, there are a ton of services out there that’ll help you invest in these vehicles wisely. Wealthfront and Betterment, for example, are two robo-advisors that automatically invest your money based on a series of risk- and reward-based questions.
The result is a personalized portfolio of debt and equity that’ll mitigate your risk and maximize your potential returns, given you risk tolerance. What’s more, the robo-advisors will even automatically rebalance your portfolio as well as conduct “tax-loss harvesting,” which is the act of strategically selling and buying investments at a loss to minimize your tax burden.
The best part is no investing experience needed. All you have to do is fill out the questionnaire, fund your account, and watch the dividends and price appreciation roll in.
Of course, you could actively invest yourself, which I also do. However, with the way technology is trending, it’s nearly impossible to beat robo-advisors and large institutional investors. If you have a tip on an underpriced stock, go for it. Otherwise, stick to monthly allocations with an established robo-advisor.
2. Invest in Private Debt and Equity
Once you’ve started investing in the public markets, the next step is to invest in private debt and equity. Unlike public investments, private debt and equity are a bit harder to invest in, mainly because they’re investments in private entities. For example, it would’ve been much harder to invest in Facebook as a startup than it is now.
For the most part, investing in private equity is the conscious act of starting your own company. The benefits of doing this are multiple. You’re building an appreciating asset that can generate quarterly cash returns, write-off business expenses, and can pay you a salary from its revenues.
In fact, the ceiling of potential wealth is much higher with private equity than public equity. Just ask the guys over at Snapchat. Of course, the risk is also much higher, which is why you should invest some of your money in the public markets and some of your money in private endeavors.
You can also achieve wealth through private equity if you act as an angel investor or something similar. Rather than starting your own company, this is the act of finding an existing startup company to invest in. Check out a platform like Angellist to see what startups currently have an open round of funding.
When it comes to private debt, there’s not a ton out there. Similar to investing in a startup company, private debt is the act of being a lender to an individual or private company. The benefit here is that since it’s risky and banks might not want to lend cash, you can garner a higher interest rate.
3. Invest in Real Estate Assets
Throughout this whole journey of public and private debt/equity investments, you’ll also want to begin investing in real estate. This is typically the third step because the upfront capital needed to invest in an investment property is the highest. However, with new technology and regulatory standards, it’s possible to invest in real estate-like funds, too.
So, the first place you’ll want to look when investing in real estate is a traditional income property. Hey, even Arnold Schwarzenegger made his first dollars investing in income-producing apartment complexes in Los Angeles. If it’s good enough for the Terminator, it should be good for common folk like you and me.
Of course, this isn’t the only way. If you don’t have the upfront capital or time needed to find and finance an investment property, you can always invest in a REIT or real estate-specific ETF. Further, with online crowdfunding websites like Fundrise, you can now invest in a diversified pool of real estate assets known as “eREITs.”
Basically, there’s no excuse to not have some sort of real estate asset in your overall investment portfolio. As the third pillar of wealth, real estate will give you a long-term asset that rounds out your diversification, monthly cash flow, and therefore your overall wealth.
In conclusion, I want to quickly discuss an example of why it pays to be wealthy (literally), while it doesn’t pay to be rich.
Inflation, which is the measure of rising prices over time, averages about 1.5% – 2% a year. This means that your purchasing power, that is, the number of things you can buy with your existing dollars, declines by about ~1.5% a year. If you’re not investing in appreciating assets, you’re effectively losing as much as 2% a year.
Better to create sustained wealth, no?