What’s The Difference Between Rich And Wealthy? (2024)

Luxury labels. Expensive cars. Sprawling mansions. We’re accustomed to thinking of these things as symbols of wealth, but visuals can be misleading. Renowned billionaire investor Warren Buffett drives a decade-old car and lives in the same house he bought in 1958 for less than $32,000—that’s only about $329,000 when adjusted for inflation.

Someone with a multi-million-dollar estate may be rich, but they might not be wealthy. Whereas someone who is quite wealthy may not appear that way to others. The terms “rich” and “wealthy” are often used interchangeably, but they actually refer to very different populations.

Wealthy vs. Rich: How Experts Define Them

As of 2022, the average personal income in the U.S. was $59,430, but the top 1% earned significantly more.

According to the Economic Policy Institute, you need to earn at least $421,926 to be considered part of the top 1%. But the average earnings of this group was over $1.3 million, signaling just how rich this group is.

However, although everyone in the 1% is rich by objective standards, not everyone in that group is considered wealthy.

“When someone is considered rich, we would classify that as someone with a current larger income than their fixed expenses, allowing them to live an extravagant lifestyle,” David Morgan, managing partner with the High Net Worth Advisory, says.

“When someone is wealthy, their assets are more substantial than their liabilities, allowing the assets to generate an income large enough to cover fixed expenses.”

While various factors influence wealth, it’s essential to recognize these distinct differences:

Income Sources

There are many ways to become rich. You could inherit money, win the lottery or have a high-paying job. But the income sources aren’t going to pay out in perpetuity. Eventually, the money runs out or you retire, depleting your resources.

True wealth is all about sustainability. Whether you come from generational wealth or are completely self-made, wealthy people tend to have investments and assets that continue to produce income for years—or even for generations.

Assets

If you’re rich, you may buy liquid or depreciating assets. For example, you may purchase high-end sports cars or designer clothing. You can afford to buy expensive things, but these purchases don’t produce income and can lose value over time.

By contrast, wealthy people tend to think about the long-term.

“Wealthy people make their financial decisions based on their set of values and goals,” says Kelly Palmer, a chartered financial analyst and founder of The Wealthy Parent. “Wealthy people have done the work to give their full life purpose and fulfillment, and they realize not making decisions in line with their values can hurt them in the long run.”

If they are focused on charitable giving or leaving their family a legacy, wealthy people will be more likely to invest their money in real estate, stock markets or other money-generating endeavors to achieve those goals.

Debt

Even if you are in the top 1% for income, there’s a chance you are living beyond your means. If you are nowhere near the 1% income threshold, it can be difficult to imagine outspending that kind of income, but it’s surprisingly common.

Rich people, meaning those with high incomes, often stretch their budgets to the max, purchasing expensive homes or vehicles and going on lavish vacations. They often end up using loans or credit cards to finance their purchases, and can be burdened by that debt.

Wealthy people are more likely to prioritize paying off debt to maintain their financial security. And if they do use debt, it’s usually leveraged to increase their earnings later. For example, a wealthy person may use debt to invest in real estate or a small business.

Longevity

Becoming rich is not a guarantee that a person will always have money, and that problem can affect how they handle their money.

“The rich enjoy the moment knowing that it may not last,” Morgan says. “The wealthy enjoy the moment knowing that, as long as they do not touch their major assets, it will last generationally.”

While being rich can be fleeting, wealthy people tend to think about the long term. They may focus on how to preserve wealth for generations to come, so their spending and investing habits often reflect those goals.

Going Beyond Rich: 5 Steps to Build Wealth

Is it possible to build lasting, sustainable wealth even if you weren’t born rich? Experts say yes.

“Most of my clients did not start out with an inheritance or owning a business,” Morgan says. “In many cases they cut their teeth in a corporate structure, paid their dues and then either stayed and worked their way up the ladder or left to start a business with the skills that they learned.”

To establish wealth, follow these steps:

1. Live Within Your Means

Many people in the United States are on razor thin budgets. According to a recent study released by PYMNTS and LendingClub, 64% of consumers live paycheck to paycheck. That’s true even for high earners—51% of those who earned $100,000 or more said they were living paycheck to paycheck as well.

Living within your means and having the capacity to save are essential to building wealth. To get a handle on your spending, create a budget and look for areas where you can trim or eliminate. Some of the wealthiest people made drastic changes to free up cash flow, such as renting out part of their homes, downsizing to a smaller apartment or transitioning to a one-car household.

2. Save for Emergencies

Even if you’re rich, a significant emergency or job loss can wipe out your accounts. According to the Federal Reserve, 37% of adults wouldn’t be able to cover a $400 expense with cash, savings or a credit card paid off in full by the statement due date.

Most experts advocate for saving enough money in an emergency fund to cover three to six months of expenses. It may take a while to reach that goal, but the peace of mind it will give you is well worth the wait.

3. Invest

Wealthy people know that inflation can erode the value of their money, so investing is key. The U.S. Securities and Exchange Commission (SEC) reported that the stock market had annual average returns of about 10%.

Investing in the market rather than stashing cash in a bank account or liquid assets will help preserve your wealth and generate additional income.

4. Set Aside Money for Retirement

High earners who live extravagantly may be in for a harsh surprise in retirement.

A recent study found that the median retirement savings for those between the ages of 55 and 64 was $120,000, which would generate approximately $1,000 per year over 15 years. Even if you account for Social Security payments—which average $1,791 per month—that level of retirement income is unlikely to be enough to maintain your lifestyle.

Saving for retirement as early as possible will preserve your wealth and allow you to retire in comfort. The general rule of thumb is to set aside 12% to 15% of your income. But if you are starting your retirement fund later, you may need to increase that percentage.

5. Boost Your Income

For many people, increasing their incomes is necessary to build wealth. Boosting your earnings frees up more cash for investing and other money-generating activities, so you can build lasting sources of income.

You can increase your income by working hard and getting a raise at work, learning new skills to switch careers, opening a business or starting a side hustle. Whatever you decide to do, having a plan in place for your higher income will ensure your money works harder for you over time.

“Focus on increasing your income as needed to reach your goals but always return to your values to determine if you are working too hard,” Palmer says. “Wealth is a feeling and when you put in the tough emotional work you will know when you have made it.”