About · Press · Contact · Write For Us · Top Personal Finance Blogs
Featured In:

Income vs. Wealth – What’s the Difference?

By Pat S

man walking up coins“Income” and “wealth” have incorrectly become synonymous in American culture. While the two concepts often go hand in hand, using the terms interchangeably is misleading. America’s most wealthy individuals don’t necessarily draw the highest levels of income.

For example, while professional athletes, top executives, doctors, and lawyers have reputations for high salaries, their obligations can make accumulating significant wealth very difficult. Many wealthy individuals, on the other hand, have never earned an exceptionally large paycheck.

Income vs. Wealth – Different Definitions

I like to think of income as the amount of money someone receives on a regular basis, while wealth is the length of time that person (or family) could maintain their current lifestyle without receiving compensation for performing additional work.

Why is there such a difference between income and wealth? Earning a steep salary in a high profile job or career usually comes with financial commitments – to get the job in the first place and to maintain a higher standard of living. Some of the major factors are:

Learning by Example

To explore the distinction between income and wealth in context, I’ll use two fictional 50-year-old characters: Adam and Bill.

Adam is wealthy, but has never earned a large income. Adam began working at age 22, after earning his bachelor’s degree paying in-state tuition at a state university. Although his starting salary was fairly low after graduation, Adam has managed to live well below his means. He committed to investing at least 10% of his income, and diligently shunned credit card debt. Through hard work and an excellent reputation, Adam has worked his way to a management position and now earns $60,000 a year.

Adam’s family lives simply, and they’ve remained in their small, three-bedroom house in a working class neighborhood. He and his wife paid off the mortgage a few years ago. Their children attended public schools, and when the kids grew up and needed cars, they got used cars and paid cash. They may not live a lavish life, but the family is not only comfortable – they’re debt free. And after 28 years of investing 10% of his income, Adam has built up an investment portfolio worth close to $1.5 million.

With a simple annual budget of $45,000, Adam’s family could sustain their current lifestyle for more than 30 years, without Adam or his wife ever needing to work again.

Bill earns a large income, but he isn’t wealthy – at least not yet. Unlike Adam, Bill attended an expensive private university, which, after financing, cost about $200,000. Bill is highly intelligent and hard working, and with his stellar record he gained admission to one of the best medical schools in the country, incurring another $200,000 in student loan debt to earn his M.D. After completing medical school, residency, and a fellowship, Bill got a job as a physician, starting out earning over $200,000 per year.

Especially with the comfort of a high annual salary, Bill’s family lives extremely well. He qualified for a jumbo mortgage on a $750,000 home in an exclusive gated community, complete with a golf course. Bill’s children attend the most prestigious local private schools, and Bill and his wife drive current-model, imported luxury vehicles.

A highly-proficient physician, Bill has worked his way up to an annual salary of $350,000. But Bill’s family’s expenses – the large mortgage payment, payments on two new cars, the children’s private schools, his own student loans, club memberships, luxury clothing, and expensive vacations – add up. The total cost of indulging is equal to Bill’s yearly salary. Some years the end up spending even more than Bill makes.

Bill’s family ends up living paycheck to paycheck, despite his huge annual salary. If Bill were to stop working, his family would soon be destitute.

Final Word

This example isn’t a knock on the medical profession or the financial habits of physicians, but the amount of debt that many doctors must take on for school and training certainly tempers the perception of their high salaries. It costs a lot to get to that income level, and decades can pass before a doctor makes more money than the degree cost in the first place. This simplified illustration helps to clarify the differences between wealth and income.

While a high salary can help an individual or family appear wealthy, it takes commitment and sacrifice – regardless of income  - to attain real monetary wealth. Building wealth does not require a large income; it requires a conservative, long-term mindset.

Money Crashers has plenty of tools to help educate you and your family on the best ways to increase your earning potential, reduce debt, and save more money. With a passion for personal finance and the will power to defer your immediate desires for material possessions, you can build true wealth.

Do you feel you’re poised for wealth despite a mid-level salary? Or do you have some bad disposable income habits that you need to get rid of?

(photo credit: Shutterstock)

Pat S
Pat S is an active duty military officer. On his off time he enjoys working out, reading, writing and spending time with his dog. Pat became interested in personal finance after several costly mistakes early in his military career that could have been avoided by a basic understanding of personal finance.

Related Articles

  • http://debtbeat.com Big Spender

    At the height of his success, Bill Cosby had a financial advisor tell him that he wasn’t rich. Bill argued with him and the broker explained that he was just well paid, not rich. Bill hired him on the spot to help make him rich.

    • http://compoundingreturns.blogspot.com Pat S.

      Great addition! I’m glad Bill Cosby was able to take the advice. Many people don’t want to hear it.

  • http://vertex42.com Nate Hall

    Great distinction between the two–thanks! It seems many do believe that wealth is built ONLY if you make a high six figure income. There is a distinct difference between wealth and income (and the meaning of success really).

    • http://compoundingreturns.blogspot.com Pat S.

      I completely agree that there is a huge difference between the two. Income does make it easier to build wealth, however, as long as we keep our priorities straight.

  • Clark Kimble

    There’s just one MASSIVE element missing in this blog: The impact of family money you were born or married into.

    Trust funds; inheritances; gifts of stocks, bonds, property, etc.; nest eggs; handed down generation through generation assure those down the line their money will likely earn more than THEY will on the job.

    When you’re already born on third base, you can go through life acting like you hit a triple, and no one will know any better.

    THAT’S the biggest difference between wealth and income.

  • Clark Kimble

    There’s just one MASSIVE element missing in this blog: The impact of family money you were born or married into.

    Trust funds; inheritances; gifts of stocks, bonds, property, etc.; nest eggs; handed down generation through generation assure those down the line their money will likely earn more than THEY will on the job.

    When you’re already born on third base, you can go through life acting like you hit a triple, and no one will know any better.

    THAT’S the biggest difference between wealth and income.

  • Zach

    When was this article written? Thanks.

  • Dsadh_dsa09

    qdfqwef

  • the hacker

    hahahahahahah

  • RWG

    Very helpful article. Thanks for a clear illustration of the difference.

The content on MoneyCrashers.com is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. References to products, offers, and rates from third party sites often change. While we do our best to keep these updated, numbers stated on this site may differ from actual numbers. We may have financial relationships with some of the companies mentioned on this website. Among other things, we may receive free products, services, and/or monetary compensation in exchange for featured placement of sponsored products or services. We strive to write accurate and genuine reviews and articles, and all views and opinions expressed are solely those of the authors.

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, U.S. Bank, and Barclaycard, among others.
Close