A woman who studied 600 millionaires says there's a misconception about wealth that just won't die
Jason McCawley/Getty Images
- Wealth does not equal income, but people often mistakenly think they're the same thing.
- Wealth is the net worth of a household, whereas income is what's reported on an income tax return.
- Being rich isn't about how much money you make or spend - it's about how much money you keep.
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Point blank, income and wealth are not the same thing.Wealth refers to the net worth of a household, i.e. all of its assets minus of all its liabilities, Stanley Fallaw explained. Household income is merely realized income to be reported on one's personal income tax return.
Even the Tax Foundation gets it wrong, referring to "millionaires" in terms of their income tax returns versus their net worth, Stanley Fallaw said. In reality, a millionaire's income is only 8.2% of their wealth, she found through her research.This myth is problematic, Stanley Fallaw added, because it "distorts" the numbers people focus on when trying to achieve financial independence.Read more: An early retiree who quizzed 100 millionaires about their money found there's a 4-step process to building wealth
Wealth isn't about how much money you make or spend - it's about how much money you keep
"When people say they want to be rich, what they're saying is they want to spend like a rich person. They're focusing on earning a big paycheck," Chris Reining, a self-made millionaire who retired early at age 37, previously told Business Insider.
"But that's not the definition of being rich," Reining said. "The definition of being rich is having assets generating income that exceed your standard of living."He continued: "Someone earning $50,000 a year while they sleep from dividends and investment gains and spending $40,000 a year - they're rich. I have friends earning half a million, and with private schools, second homes, and expensive lifestyles, they have nothing in their bank account - they're poor. That's why 'rich' has little to do with how big the paycheck is."
Business Insider's Lauren Lyons Cole, a certified financial planner (CFP), also found that most people inaccurately define wealth by how much people spend, not how much money they have in the bank account.buying luxury cars or filling the closet with designer clothes."
It's what they do with their income to build wealth that makes them rich; they have enough perseverance to avoid "lifestyle creep," the tendency to spend more whenever one earns more, and therefore spend below their means. This leaves enough money left over to commit to saving, ultimately increasing net worth.As Stanley Fallaw says, while income and net worth are related factors, "each should be used in different ways to assess overall financial health and progress."
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