Monday, January 07, 2008

Flipside of a Coin - Wealthy vs Rich

A topic thats been burning me to put some structure around for quite many years today I decided to key it down. . Just a few minutes back I finished watching my weekend quota of my movies. Watched Rush Hour 2 & 3 back to back, and tried to retire bac, but the itch in my mind was so high can't sleep and here I am keying in my 4th blog in 24hrs, actually would be my 6th, as I 've cleared a few post-dated drafts too.
I wanted to touch upon the topic of wether one needs to be rich or aim to be weatlhy, Had been reading a few similar article from jpmartin and rediff and decided to add my own & perspective ofcourse, I will be adding the same commentory too for few defintions and stories from a few of those sites.

Rich or Wealthy

What is the difference between being ‘rich’ and being ‘wealthy’? Is there a difference? If so, what is it? And how do we become rich or wealthy?

I always had this in my mind and sit over it brood and arive at a conclusion and sense of direction for me to achieve but after a few days everything is Status-Quo, so its high time I put my thoughts together and execute.

Defintiions first!! From a pure financial point of view, richness got to do with a potential of a person to buy nearly everything you want today as well as in the future. However, you are wealthy if you have enough money to buy everything you want today as well as in the future, and still have a great deal left over.

The other day a collegue at my office was talking about the Saree his sister bought for her engagement. The attire was predominantly designer wear and I fell out from my seat when he told the cost of the saree.
"These people must be fabulously rich." This statement was made by someone to my right and this made me a bit depressed, for I was well-off from a to-do good family, but never think of spending that much.Back home my cousin grinned and pointed out a few successful looking people who he claimed were earning well but swimming in debt, talking about his own case, on how people manage credit, and how a country like USA operates on ever mounting credit and debt.The point he was making: they may be rich but they were far from wealthy.

Is there a difference?
Sure there is. If you don't believe me, look at the antonyms.The opposite of rich is poor.The opposite of wealthy is broke.
Being rich is just a function of how much you earn. But being wealthy is a function of how well you manage your money.
An example a little down south, Kanchi in TamilNadu. One might run accross an average person clad in Dhoti, walking on the street simple and humble. A by-passer like me wouldn't even bother to look out. But thats until one where to be told that he runs his own weaving firm which earns him a Gross profit (profit after taxes) of Rs 1 crore per annum. That's shocking and one needs to learn a lot on how he has managed to save and invest wisely enough to build on these earnings.
He is not just plain rich. He is wealthy.

Digging Deeper

A bit deeper thought as I also would do, the word ‘rich’ refers to money, whereas ‘wealth’ refers to something more than just money i.e. all the essentials in life - a total package of love, good health, good living, good job, great friends and loving family, spirituality, joy, peace of mind, plenty of time, combined with money and contentment with yourself and what you have. Being wealthy depends on what YOU believe is enough to make you happy, the amount is not the key.

Relativity Theory
This is something which happened on my way from Vizag to a small place in coastal Andhra, added some commentary from a similar article- As an educated person from a city, a well-paid professional. Say on the trip to a rural place to set eyes on the un-spoilt surroundings and one meets an elderly person, revered by all the locals
During the conversation, the leader shows interest to know more about you, the city and how wealthy one is - a matter of curiosity for him - a person from such a far off place to come and see him must have a lot of wealth!
One would probably flash one's E-services Nokia mobile, and digitl SLR, a Timex watch, nike shoes and all the designer brands one fancies. Then probably start talking about ones assets, cars, an excellent job. The elder nod’s his head in acceptance and then frowns in disappointment and looks to the other elders sitting beside, and starts a discussion with them. He comments on how many people he knows in his city and enquires about his social stature. For him we are extremely poor, because one's deprived off all he is revered for in his small village.

Now try to project the same to the millions of people who go to USA/UK or to that matter any country abroad for the making it big in life . They would be living the life facing lots of hardships, working it out in the toughest of conditions to earn those few extra dollars, back home they project themselves to be filthy rich. For example smaller cities in Punjab have the maximum number of Luxary cars in India, and these are funded by people who probably lived a tough life but show off a lot in there own back-yard. Owning a Merc is not a big deal abroad but is in India

Wealth is measured by everyone differently; each person has his/her own way of deciding how wealthy they are. Across countries and economies, what might be a luxury for some is not for others.

Someone once very rightly told that the difference between the rich and the wealthy is that the rich need to impress and the wealthy need to be impressed. In a way it does seem to be true. I've noticed many people who in order to keep up with the crowd or stand apart - try to impress by owning and driving a fancy car, live in a fancy house, wear fancy clothes and eat at fancy restaurants - anything to show that they are well off.
The rich become flush with money in a number of ways. They may inherit it, earn it in a few short years as a professional sports player or entertainer, or invent a new technology that is worth millions, or simply earn it over many years as a professional or a business owner or in because they are lucky make it in real-estate, gambling or stocks. So with all this money, they buy assets, generally those that depreciate fast.
On the other hand, wealthy people buy assets that can be converted to other assets i.e. value-creating assets. Those assets can be tangible like your business, your second house and intangible, like your knowledge, skills or even peace of mind!
The difference between a wealthy person and someone who is simply rich is that a wealthy person has sustainable wealth. A wealthy person will always be wealthy, because he is planning for generations, whereas someone who is just rich will only be so for a short period of time until the money is exhausted.

Reality Check
Is one wealthy?
One may be earning a lot but what one does with the money is what matters. In fact, a person earning comparitively lesser might be wealthier simply because they know how to manage their money and you don't.
The first step is to how the cash flows are (Cash flow statement not required here!!)
Let's say one is earning Rs 50,000 a month. Definitely, you will be considered rich.
But what if 50% of that is spent on servicing your credit card debt, personal loan and home loan? And the balance is blown up on petrol, eating out, buying expensive gadgets and hectic socialising?
With all the earnings channelised towards loan repayments and lifestyle maintenance, one certainly is not wealthy; neither one is heading in that direction.
If one is spending the bulk of earnings, they are certainly not on way to being wealthy.

Wealthy people know how to make money. Once you have the know-how, you can build sustainable wealth. Wealthy know that money comes and money goes - it’s not a big deal. But they also know how to generate wealth, when it’s gone.The best example is written down in history, by the richest man who ever lived. He obtained his wealth through knowledge and valued knowledge more than wealth or money. That man was none other than King Solomon. He was extraordinarily wealthy, even by today’s standards. But he was also extremely wise, the wisest who ever lived.When he first became king, when God asked of him what he wanted, he asked not for riches, but for knowledge and wisdom. And throughout Solomon’s writings, he lists wisdom and knowledge as the two most important gifts to ask of God. God gave wisdom and knowledge to help create Solomon’s great wealth.

What will make you wealthy?
Understanding time value of money, depreciation of assets and a good understanding of asset classes is of outmost importance.
  • To be wealthy, one should invest in assets that generate money.Land, homes, art, equity are all wealth building assets. One can get phenomenal returns from them over the long term.
  • The value of assets like cars, bikes, televisions and electronic goods decreases over time. They are assets that depreciate in value. While one will spend some amount of money on them, one should also look at assets that appreciate in value over time.
  • Other investments like bonds and fixed deposits will ensure money is returned but neednot be the best grosser.
  • Gold, these days has seen imense appreciation and is also liquied. With a lot of gold locked in the lockers, Indians are a fag wealthier than many of their western counterparts.

Golden Rules

~ Live below one's means.
~ Budget the spending.
~ Save on taxes.
~ Have a planned, disciplined approach to investing money to maximizse value creation
~ Invest in future, knowldege and wisdom.
~ Value relationships they always pay, are intangible & invaluble of all the assets

Words of Wisdom
Millionaires focus on building wealth, not consuming goods. They are also frugal, a quality that most non-millionaires don't possess

Rich or wealthy?

I figured I am neither :)

Being rich is having money to burn (which I don't have).

Being wealthy is not wanting to (and I do so badly want to!).

But I sure know where I am headed. Have you !!

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