You have heard those terms countless times and most people are too proud to admit that they actually do not understand the difference between being rich and being wealthy. Most think that you can substitute rich and wealthy in a sentence without altering the outcome and meaning of it. This is one of the smaller reasons why the majority struggles to get ahead and why the Top 5% continue to increase their net worth.
Did you know that you can be rich, but not wealthy and that you could be wealthy and not rich?
Of course it boils down to your definition of rich and we all differ on how we classify an individual as rich. Since the definition of rich is a variable which can change from person to person, let us focused on the fixed variable which is the definition of wealth and being wealthy.
What does it mean to be wealthy?
In very simple terms wealth is a measure of how many days forward your capital will allow you to live the lifestyle you desire if you decided to stop receiving any form of income; regardless if it is active or passive.
Please note that wealthy people always will have passive income which just secures their wealth status.
So how can you be wealthy, but not rich?
The following simplified example should shed some light into this financial phenomenon.
Let’s take an individual currently 40 years old who requires a total of $2,000 per month to live his dream life. This means that the individual needs a total of $24,000 per year in order to remain happy with the created lifestyle. The average expected lifecycle of humans in the western world is just shy of 80 years so this person would have another 40 years left. As stated, this is a simplified example.
This means once this person has accumulated $960,000 (40 years x $24,000) wealth status has been accomplished, but most would not classify this person as rich. Now this example used an all-cash scenario.
Most people do not apply this which makes the following example even more clear on how you can be wealthy, but not rich.
The same individual, 40 years of age and total annual expenses of $24,000, does make use of financial markets and his annual return on investment is only 6% which is far below what you should earn from financial markets on a consistent annual base if you make the smart decisions. For now, let us take this not so smart example.
In order for our individual to be classified as wealthy total annual passive income needs to be $24,000 and at an ROI (Return on Investment) of 6% a portfolio of $400,000 is required. This is less than half of the first example and a long way from being rich, but this individual is wealthy and most important of all financially free and independent.
A final example will take our 40 year old in the smart category of financial decision making and now an annual ROI of 15% is comfortably achieved on a consistent base.
In order for our individual to meet the criteria of being wealthy a portfolio the size of $160,000 is required since it would generate $24,000 in passive income per year at 15%. Our individual is nowhere close to being rich, but wealthy and financially independent.
As stated, the examples are very simplified and on your way to wealth creation your portfolio will continue to grow as long as you keep your expenses below your income. This is why the wealthy get wealthier and the poor get poorer. Eventually you will become wealthy and rich which will take time.
Which one would you rather be; rich or wealthy?
Regardless of which side you pick, plenty will wonder where to start. In today’s world it has never been easier and the popularity of forex trading has created plenty of opportunities for people to gain wealth status. Having said that; please be aware that forex trading is by no means simple and 98% of traders will fail as they believe terrible marketing campaigns.
Regardless of how you desire to create wealth, there is no substitute for hard work, knowledge and experience. Should you decide to sniff out the forex market I would recommend that you take a look at a post over at PaxForex which outlines the Top 5 Attributes of Successful Forex Traders.