Income and Wealth
Is there a difference between the two, and is it important?
My college student did not know the difference until writing this paper.
This comic strip tells the difference between starting off wealthy or not wealthy, but it does not quite explain the difference between income and wealth.
- “Income” means the money earned over a month or a year.
- “Wealth” means money or assets stored from previous years, or especially from previous generations.
- “Liabilities” are claims other people have on someone’s income.
- Liabilities are not usually looked at when people shout about wealth, but they should be.
Suppose Jim and Bob both make $30,000 a year, and each have been working for a year and a half. That’s $2,500 a month. In some places, that’s barely enough to pay rent and food, with very little left over for clothing, home repairs, and maybe a little entertainment.
- Does that mean Jim and Bob are both poor?
- Why Not?
Income Without Wealth
Jim’s parents are kind and loving, but they don’t have much wealth, and Jim has to buy everything he needs, from the pots and pans, table, and bed in his apartment (for which he paid first & last month rent + security deposit) to the food for the pot, plates and cutlery for the table, and linen for the bed. That doesn’t leave much spare cash left over.
Right now Jim had one pot, one pan, ‘borrows’ plastic cutlery from the cafeteria at work, and sleeps on the cheapest sheets from Telco. He’s buying cheap groceries and saving up for a nice(ish) set of forks and knives. And a new pot, too, one which won’t lose the handle after being used for two months. 😦
Going out to see the new “Star Wars” movie is a joke. Not happening. But don’t worry, it will still be good when it comes out on DVD!
Income With Wealth
Bob’s parents are kind and loving, and they are moderately well off. Not rich, but comfortable. They paid the ‘first month and security deposit’ for Bob’s really nice apartment, helped buy the furniture, and gave him some slightly used kitchen equipment and bed linen.
Bob buys groceries with an eye to the price, but a much wider variety than Jim. Bob buys clothes that Jim doesn’t even let himself look at, because there’s no way he can afford it. Bob thinks he’s kind of deprived because he can’t afford the cute corkscrew that would go so well with the good wine he bought to impress his girlfriend.
Bob will be going to the Star Wars movie with a few friends. He’s going to treat them to popcorn, soda, and junk food from the theater, since bringing outside food is against the rules, and some of his friends can’t afford the theater’s prices.
Income With Wealth and Liabilities
There’s that L word again. L is for Liability. L is for Loss.
Jim and Bob have two tracks:
- one where they save money
- one where he spends all of his beautiful income
1) Jim goes to a state college, gets a decent job, and saves some money every month. He starts to build wealth – money that is saved from month to month, year to year, and maybe generation to generation. Jim wants his kids to have a better start than his parents gave him. His parents are proud.
2) Jim goes to a state college, gets a decent job, and buys a better house. He furnishes it with all the things he wished he had as a kid. He can’t afford to send his kids to a better college, and he can’t help his kids much when they move out.
1) Bob goes to an elite college. His degree comes with $80,000 in student loan debt. He has a great job, but he needs to buy designer suits and drive a new car to impress the clients. He and his wife keep track of their student loans and car debts and pay it off. This means buying a smaller house than some of their colleagues, but they think it’s worth it. They don’t buy the kids every new toy on the market, and once the loans are paid off, they keep right on paying that amount into a savings account. When the kids are ready for college, they have an enormous nest egg. The next generation will have more wealth than the previous generation. Someday, Bob’s grandchildren might make the top 10% in the nation.
2)Bob goes to an elite college. His degree comes with $80,000 in student loan debt. He has a great job, but he needs to buy designer suits and drive a new car to impress the clients. Paying off the loans doesn’t mean he and his wife pinch their pennies, it just means that they don’t save anything. Some months, they dip into their savings – but that’s OK, they’ll pay it back to themselves… but they never do. His kids still go to an elite college, and although Bob doesn’t leave them much savings, he does leave the big house and a whole lot of stuff.
Here’s the bottom line: someone whose family has wealth will usually accumulate more wealth, even if they spend to the limit of their income and slightly past it. Moving from ‘poor’ to ‘middle class’ is much harder than moving from ‘middle class’ to ‘rich’. It’s not impossible – technically, anyone can do it – but technically, anyone who can run can win a marathon.