Wealth vs Income

On February 21, 2011 in Big Picture by notrustfund

I’ve been thinking recently about the difference between wealth and income.  More specifically, the phenomenon that you can have an extremely high income, yet not be wealthy and you can be wealthy without a high income.  Throughout the recent economic downturn, there have been stories of people who once had huge salaries, but now are stretching to make ends meet.  And then I read an article about HENRYs.  What is a HENRY you might ask?  I had never heard of this term either.  HENRY stands for high earners, not rich yet.  What strikes me about this acronym is the yet, as if everyone who has a high income is destined to be rich, when clearly that is not the case.

In my first job after college, I worked in an environment where there were a lot of people under the age of 30 making an insane amount of money.  And while I was never one of those people, it gave me some insight as to how you could have an income well into the six figures, or even higher, yet not have a lot of savings.  The following three traps make it hard build real wealth:

Assuming you will always earn a lot, or even more

It’s so easy to fall into the trap of feeling like you do not need to save now, because you will earn even more later down the line and can start saving then.  However, lifestyle creep happens and tomorrow never comes.  There is no easier time to save than the first year you are making a bigger income.  Start saving then and keep up the habit for life.  Then you can be a higher earner AND wealthy! There’s also no guarantee that if you lose your current job, your next job will pay the same or even more.  While it is nice to imagine, prepare for a less lucrative future.  Or for a scenario where you no longer want the big job with a big income.

Thinking that you work hard for your money so you deserve all the finer things in life

Most jobs that pay well do so because they require a lot of sacrifice: a lot of time at work, time on the road, or extreme stress.  As a result of this sacrifice, you want to ‘treat’ yourself.  Again and again and again.  You work all the time so you need to have someone clean your house, you deserve a weekly massage, you must have take out.  Why do you have this high pressure job if you can’t have a designer handbag or a fancy sports car?

Once you have built some savings and are on your way to becoming wealthy you can start spending a little more.  But in the beginning, save as much as you can.  And if you do ‘treat’ yourself, pick one thing, not everything.

Keeping up with the Joneses

If you earn a big fancy income, you most likely work with a lot of people who also have big incomes.  And if you use your big income to buy a house in a fancy neighborhood, your neighbors probably make big incomes too.  The guy next door has an X5, you need one too.  Your co-worker buys his wife-to-be a diamond rock, you need to do the same for your honey.  High income work environments often come with a lot of peer pressure to spend big on material possessions.

The good news is that you don’t have to have an insane level of income to become wealthy.  The key to building wealth over time is to live within your means.  And if you are lucky enough to be a HENRY save as much of your income as you can for the first few years.  There’s no guarantee the salary will continue and, with such a high income, the ‘yet’ should come sooner rather than later!

*Need some inspiration to save, read about a plan to retire by 40!

**Photo by arghmonkey

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2 Responses to Wealth vs Income

  1. AMEN!!! Say that loud and clear…over and over. Great post! Going in my round up!

  2. DreamChaser57 says:

    Timely post. My husband and I were recently able to help a dear family friend who was struggling. The friend was quite grateful and casually mentioned that she knows other people who can afford it but did not offer. Income is not a proxy for wealth. We are typically a two income household however I am currently laid off. She naively assumed that we are struggling because we have just one income. However, we live way below our means. I have also taken the time to read plenty of personal finance classics and develop a plan to pay off all our consumer debt. Thankfully, we’re doing well. My mindset has completely changed, just because I see someone driving a Benz or BMW, I don’t assume they are wealthy, they could be just overleaveraged.

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