More income doesn’t make you rich

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Nick Foy, CFP®

The media and politicians make this mistake all the time, but it’s worth pointing out: More income doesn’t make you rich.

A couple of months ago, Business Insider answered the question entirely incorrectly: How much money you have to earn to be considered rich in 42 major US cities.

The article proceeds to tell us how much income someone needs to earn in order to be in the top 1% in cities all over the country. What they don’t mention, though, is that income has almost nothing to do with wealth.

Wealth only happens when income is retained, and assets grow. The person who makes $1 million but spends $1.2 million most certainly is not wealthy; they’re in debt.

The income statement doesn’t tell us much. The balance sheet, on the other hand, gives us a much better picture of wealth. With some frequency, I meet with people who have plenty of income and terrible balance sheets. They’re not wealthy because they don’t behave well.

Sure, they might have leased a sweet ride, or they might live in a big house, but outward signs of wealth can be smoke and mirrors.

The next time a politician (or businessman) says s/he wants to raise taxes on the wealthy, know that income only produces wealth for those that choose to retain it.

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