Income vs Wealth

Income is money earned from providing a service, selling goods or returns on an investment. Income includes things like salaries, wages, interest, business revenue, rents, dividends, property income, etc. 

Wealth is what you get when you convert your income into assets which generate additional income or increase in value. For example you can use your salary to buy land, start a business, buy treasury bills, build rentals, buy shares, etc. Wealth can also be generated by creating something valuable like an invention or a product/service.

A high income doesn’t necessarily mean that you’re wealthy. Don’t be deceived by the flashy people around town and on social media.  A typical wealthy person leads a simple normal lifestyle. This phenomenon is well illustrated in a book called Everyday Millionaires by Chris Hogan. People with low incomes can become wealthy if they prudently buy assets. 

We can have active and passive income. Active income is money you literally have to work for like salary and wages. Passive income comes from your assets like rental income or interest. You need some kind of skill to generate active income in the form of wages and salaries. If you’re lucky and prudent enough this income can grow and multiply into wealth. 

What you want to do is build wealth over a long period of time. This is because your propensity to earn active income reduces with age. For example older footballers generally command less pay than than their younger counterparts. In fact the careers of professional athletes are quite short lived. 

So you need to convert your active income into passive income by buying assets while you still can. The rents from your wealth will ultimately sustain you in retirement, educate your children, and can be passed on as an inheritance. .

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