The terms “wealth” and “income” are frequently used interchangeably. However, they are not synonymous. A retiree living in a $500,000 home could be considered wealthy, but if her pension is just $100 per week, most people would consider her to be poor. Distinguishing between wealth and income leads to more clarity on what is on paper and what is the reality. It helps us strategize our future goals and investments. This is one of the main reasons why it’s critical to recognize the distinction between income and wealth.
What is income?
It’s money received by an individual or a business in return for work, the production of a good or service, or the investment of capital. Individuals usually earn money through wages or salaries, whereas corporations make money by selling goods or services for more than their cost of production, this all comes under the term “income”. Disposable income is calculated by subtracting the amount of money that comes into a household (typically salary and government payments) from the amount that goes out in taxes.
In simple terms, Income is what you earn when you work and are paid a wage for it. When you sell your goods, when you put money into a business and share in the earnings, in all of this, you’re generating income.
The majority of sources of income are usually taxed. After you’ve paid your taxes and deducted all of your costs, your income is what’s left. One of the most important characteristics of income is that it is created fast – getting a paycheck doesn’t take forever.
Therefore, Income comes quickly, and there’s no reason why you shouldn’t have many sources of income. Something along those lines would be even better, especially if you can automate some of those revenue sources to create money for you without your direct involvement.
What is wealth?
Most individuals have an intuitive sense of what wealth entails: money in the bank, real estate and land, stock and stock options, jewelry and art, pension and life insurance rights, and so on. On the other hand, wealth has both a positive and negative side. We may have obligations, such as loans and mortgages, in addition to assets, such as our savings. When we add together these assets and obligations, we get a picture of people’s net worth.
Why is it essential to know your net worth?
Wealth is significant for a variety of reasons:
- It is a safety net for those who lose their jobs or fall on hard times.
- It may also offer a source of income, such as interest on bank deposits or dividends on stock.
- It allows people to make one-time or large-scale investments, such as in their education or real estate.
Measuring wealth is a difficult task, and not every country does it in the same manner – for example, some nations include the value of a pension, while others do not. As a result, it’s critical to read the fine print of any wealth measure to discover what’s included and what’s left out.
Comparison between wealth and income
As wealth is built up over time, it is expected that it is often higher than income. The approximate household disposable income per capita in OECD nations is $25,908 per year, whereas the average household net financial worth per capita is $67,139. The second characteristic of wealth is that it is often distributed even more unequally than income, implying that wealth disparities are more acute than income inequalities.
But you might think, why does this matter? Here’s why. Wealth may produce income on its own; thus, when wealth disparities increase, they feed income disparities. Widening disparities indicate an increasing difference between affluent and poor in their ability to take advantage of investment opportunities, as money is a source of investment.
- A person’s wealth is the entire value of his assets minus his obligations, whereas income is the amount of money received in exchange for services, sales of goods, or investment profits.
- Wealth takes a long time to accumulate, but income is instantaneous.
- Wealth provides income, and wealth allows a person to enjoy the fruits of his effort.
- Wealth consists of cash, real estate, and personal property such as jewelry and automobiles, whereas income is generally expressed by a specific dollar number.
- If people work hard and save a portion of their income, they can become wealthy. They will eventually not need to work in order to create revenue since their riches will be sufficient.