I had a conversation with a friend about the difference between wealth and income. They’re not the same thing. I realized through this conversation that some people aren’t aware of the difference between the two.
Wealth is the value of the assets you own (minus your liabilities, or debts). Assets include real estate, personal property (art, jewelry, etc.), and equity (i.e., ownership) in public or private companies.
Income is the money generated from your labor, wealth, or ingenuity.
Money isn’t wealth. It’s more of a medium of exchange that facilitates trade. It allows you to buy goods and services.
One of the hardest concepts for people to understand is that you can have high income but not wealth. For example, if you make $1 million a year and have $999,999 of annual expenses, you’re not increasing your wealth.
Conversely, you can have wealth but not generate enough income to pay your living expenses, which depletes your wealth.
Wealth and income are different, and it’s important—especially for entrepreneurs—to understand why.