The Difference Between Rich & Wealthy
Being Rich vs. Being Wealthy. What is the difference? 4 keys to create and maintain wealth.
There are countless stories of athletes who that made millions over the course of their careers, but due to poor financial choices were unable to turn that high income into long lasting wealth once they retired. Superstar athletes like Curt Schilling, Mike Tyson, and Allen Iverson each of whom made over $100 million in their playing careers, wound up declaring bankruptcy after retiring. According to a study done by Sports Illustrated in 2009, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce by the time they have been retired for two years. An estimated 60% of former NBA players have suffered the same fate within five years of retirement. According to a sperate study by the National Bureau of Economic Research (NBER), close to 16% of the NFL players in the study that were drafted between 1996 to 2003 also filed for bankruptcy within just 12 years of retirement.
Being rich simply means having a high income, or a large amount of cash on hand. Being wealthy means accumulating a significant amount of assets, which result in a high net worth.
You can be rich and never become wealthy, but you can also become wealthy without ever being rich.
Athletes are notorious for falling into the first category; rich while playing, but never accumulating a significant amount of wealth due to lavish spending habits, lack of savings, and irresponsible use of credit. The biggest difference between people who are rich versus people who are wealthy, is that rich people spend most of their money, while wealthy people save and invest most of their money.
Those who fall in the latter category might have a lot of money, but they are much more frugal with their financial choices. They tend to spend below their means and avoid using debt unless it is for a clear purpose, such as buying a house or investing in a business. The only way to transition from being rich to being wealthy is to save your money, pay off debt, and accumulate assets.
Becoming wealthy is a mindset. Just like being a great athlete, it takes discipline, planning, and a willingness to think long-term. Here are 4 keys to build and maintain wealth:
Save at least 10% of your income.
A cornerstone of wealth creation is setting aside money for later as you are earning it. No matter how large or small your income is, start by budgeting and saving. The baseline recommendation is to save at least 10% of everything you earn. Creating a monthly budget will help manage your cash flow and help you figure out how much money is coming in and going out every month. As you get more comfortable tracking your budget, make it a goal to raise your savings rate over time. The key here is being frugal and spending within your means. There are plenty of great apps available for tracking expenses and helping you budget, such as Mint, Personal Capital, or PocketGuard among others.
Pro tip: Once you have your budget set up and are beginning to save, the next step in your financial plan is building up an emergency fund that equals 3-6 months of your current monthly expenses.
Pay Down Debt
In order to build wealth, one of the most important things you can do is pay off debt. Debt is subtracted from your net worth; it is possible to have a negative net worth if the total amount of debts that you owe exceeds the amount of assets that you own. When working on paying off debt, start with high interest rate credit cards, and then work down to other debt with lower interest rates. Debt such as a mortgage loan, business loan, or student loans are typically considered “good” debt since it is an investment in something that can produce higher returns in the future. (an investment in your home, a business, or yourself.)
Invest in assets early and invest often
Once you are consistently saving 10% or more of the money you earn, have created your emergency fund, and have paid off your high interest debt; you need to put the money that you are saving to work for you This is done by investing in assets that will appreciate in value over time, such as real estate or the stock market. Most Americans have two primary sources of wealth, the equity in their home (real estate) and their financial assets (stocks & bonds). The stock market is one of the greatest wealth creation tools ever created, due to the long-term power of economic growth combined with compounding interest. Americans who own the largest share of investment assets are, unsurprisingly, the wealthiest.
The key is to start early and continue investing your savings as you earn money throughout your career. This allows the power of compounding interest to work for you over time. Investing can be done on your own through a broker, a company sponsored retirement plan, or through an investment advisor for those seeking professional guidance.
Pro Tip: Think long term with your stock market investments, the longer you stay invested, the better your chances for success.
Building wealth is a long-term process.
In most cases, especially for professional athletes; being “rich” is temporary. Having a high salary and bringing in a lot of cash is great, but just because you are rich does not mean that you will stay that way. It is important to have a long-term perspective when thinking about finances. Building and maintaining wealth does not happen overnight. It takes discipline, consistency, and most importantly, time to accumulate the type of wealth that will give you true financial freedom. If you have the discipline to maintain your budget and avoid large debts while consistently saving that money and investing it over time; you will be on the right path to long-term financial success and wealth.
Pro Tip: If you are thinking about hiring professional help for your financial planning., many advisors will offer you a free “first look” meeting to go over your assets with you before you choose which firm to hire.
Jonathan Perrin is a former professional baseball player turned financial advisor. Jonathan was selected in the 2015 Major League Baseball Draft by the Milwaukee Brewers after graduating from Oklahoma State University. His professional career spanned five seasons, including stops in both Mexico and the Dominican Republic. Jonathan became a licensed investment advisor while still an active professional baseball player, with his first clients being his teammates. Post-playing career; Jonathan earned a Masters in Personal Financial Planning from the University of Missouri, and has continued to work as a financial advisor at helping professional athletes and other young professionals manage and invest their money to create long-term wealth.
Disclaimer: This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading or distribution strategy. Past performance does not guarantee future results. The accuracy and completeness of this information is not guaranteed and is subject to change. Waterfront Wealth Inc. is currently registered as an investment adviser with the Securities and Exchange Commission.
