Income vs Wealth

I recently shared the above quote on instagram and was asked to elaborate further. Understanding the difference between income and wealth is essential when going on a wealth building journey so I think it’s worth a deep dive.

Income is perhaps the easiest to understand as most of us receive it in the form of a salary. It typically refers to money earned through active participation such as employment but also can be earned through other sources such as investments e.g dividend or rental income. An income is usually used to cover regular expenses.

Wealth on the other hand is measured through net worth (total assets - total liabilities). It’s a reflection of assets accumulated over time rather than a flow of money. It is said to be a better measure of long-term financial security as it tends to be more stable than income. Wealth can be created through income that is earned but it can also be used to generate an income. It includes assets such as land, property, stocks, investment funds, cash and more.

While wealth and income are connected, income should not be used as a measure of wealth. Firstly, many affluent individuals report income levels that do not reflect their wealth. For instance, Warren Buffet, with a net worth of $135.6 billion, earns a salary of just $100,000 per year, and Patricia Bright, a millionaire, earns ￡65,000 annually. This approach is often chosen because income is easier to track and therefore easier to tax than wealth. Hence having a lower reported income allows affluent individuals to preserve more of their wealth. This is also one of the reasons why the wealth divide in most countries is much larger than the income divide.

Secondly, there are high earners who have little or even negative net worth due to having more liabilities (debts) than savings or investments. Conversely, some lower earners accumulate higher net worths. For instance this lady who earns $40,000 per year but has a net worth over $100k in her 30s -wealthier than most people I know on a salary that is just above the UK average. Despite these examples, society generally does not perceive wealth in this manner.

The purpose of this is to highlight that regardless of whether your income is high or low, you can still accumulate wealth, which is crucial for securing your financial future. Even with a high income, if you do not use it to build wealth, the disparity between you and the wealthy will only continue to grow. This is because the return on capital exceeds the rate of economic growth, meaning asset prices increase faster than wages. For most people, wealth accumulation can occur passively, requiring no additional effort unlike income growth.

So, what should you do? I've invested countless hours crafting detailed content to assist people in building wealth through methods I understand well. I've compiled 1 hour and 50 minutes of content on managing your money, tailored for those who feel they lack basic financial management skills to kickstart their wealth-building journey. 3 hours and 30 minutes of comprehensive guidance on purchasing your first property in the UK , and over 6 hours of content on achieving financial independence through property and geographic arbitrage.

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