Wealth vs. Income

[canyonwalker]

"That person has a high income," you might hear. "They're wealthy."

That might be true for the hypothetical person in question... but those are two different statements. Wealth and income aren't the same thing, even though they are often used interchangeably.

Why does the difference matter? Well, for one, if you'd like to become wealthier (who doesn't!) it helps to understand what these measurements are. Two, understanding the difference between wealth and income helps you understand more about the people around you— whether it's your family, your friends, or the (presumably) rich and powerful.

Put simply, wealth is a measure of how much stuff a person (or company, or country, etc.) has. Long ago it was commonly measured in things like number of goats and chickens. Today it's usually measured in money. ...Though it isn't only in the form of money. Wealth includes things like land, houses, and works of art.

Income is the amount of stuff you've gained over a given period of time, usually a year. The commonest form of income is wages from working. Almost everybody has earned those at some point in their lives, or will. But there are other forms of income, too. If you have money (wealth) in a bank account that pays interest, the interest is income. Similarly, if you own stocks or bonds that pay dividends, those are income. And if you buy a stock today for $10 and sell it tomorrow for $11, that $1 gain is income.

Mathematically speaking, income is a rate of change of wealth. ...Okay, does math and the phrase "rate of change" sound a bit scary? Are you having flashbacks to pre-calculus classes in high school? Think of it in terms of the simple analogy of a faucet and a bucket of water.

The water in the bucket is wealth. You can measure and describe the amount you have. It could be a few ounces, a gallon or two, 100 gallons, or 10,000 gallons. ...Okay, for the latter two it's not really a bucket anymore but a bathtub or swimming pool. That's fine for the purposes of analogy; some people have way more wealth than others.

The faucet is income. Or, more precisely, the rate of flow of the faucet is income. The faucet might just be dripping water— that's a small income— or it might be pouring, or it might be gushing.

Note that the faucet and the bucket are related, but not the same. They're related because if the faucet is only dripping water, the bucket will tend not to be very full. Likewise, if the faucet is pouring fast, the bucket will tend to be full. But neither of these are a guarantee. The bucket might already be full from wealth accumulated in the past even though the faucet today is only adding drips. Maybe the faucet's even shut off entirely. And conversely, the faucet may be pouring water into the bucket fast, but what if there's a hole at the bottom of the bucket that's leaking water out just as fast? 😰

These all correspond to common real-world scenarios about wealth vs. income I'll illustrate in a subsequent blog.

Comments

[some_other_dave]

The last case seems to be where you and I have been. I have heard the phrase "high net worker" used; meaning someone with a high salary but not a lot of income from other sources. That very often comes with a very high cost of living, particularly housing of course.

[canyonwalker]

I was thinking more about the people living paycheck-to-paycheck when I wrote that line. What you're describing is an adjacent category. It happens to have its own name, as I noted in a blog 3 years ago: HENRY (High Earners Not Rich Yet). I plan to address that as one of the examples in my next blog in that series.