Remember: income and wealth aren’t the same thing

Managing your money effectively matters so much more than your income.

Which is better to have, high wealth or a high income?

The question isn’t a good one, and lacks nuance, but it’s a good test, in case you think to yourself, “aren’t they the same thing?“

Nope.

You could be excused to think that if you possessed a high income, you’d be wealthy. I mean, it seems as obvious as the Monty Hall problem.

And, if you’re familiar with the Monty Hall Problem (in case you don’t know, it’s the brain teaser with the doors and the car and the goats), you know that what is obvious is also wrong.

Do you want to make more money?

When I was a kid, they had these TV commercials about a correspondence course. It contained the memorable tagline “Do you want to make more money? Sure, we all do!”

And it seems wrong on its face to think that higher income could be a bad thing.

What I’m going to argue is that it might be a neutral thing.

Because it is all too easy to let your lifestyle grow with your income.

How your lifestyle can always grow

Let’s talking about housing.

When you’re working a low-rent service job, maybe right out of college, you have a crummy shared apartment or a flophouse with friends. It might be fine, but as soon as you get a better paying job, you move out and get your own place.

Not a bad change, of course, but you just doubled or tripled your rent. You might have disposable income, but you also just spent your disposable income too.

Now, what happens when you get a salary job in a nice office? You decide to put down roots and buy a place.

Get a promotion and move on up? You buy a larger house, especially if you have a partner with which you’re wanting to start a family.

This cycle never has an end. There will always be bigger and larger homes to own. And when you have the biggest, grandest home, then you could always start buying second homes. Investment properties. Pieds-a-terre.

When you make $1,000,000 a year, you’re living on a different scale, and the urge to match that income with that lifestyle is going to be hard to resist.

I used the example of living spaces, our single largest asset for most of us, but I could just have easily have talked about anything: cars, travel, education, kitchen appliances, ways to get to the airport. There is always a more expensive version of something to spend money on. Always.

But what that means in practice is that, you could have a $50,000 yearly income and spend $50,000, and you could have a $500,000 yearly income and spend…$500,000.

Or more.

Someone who makes $50,000 and lives a sufficiently streamlined lifestyle can put away a large chunk of their salary and build some serious wealth.

Someone who makes $500,000 can be underwater in their mortgage and maxed out on all their credit cards.

What is wealth?

Wealth isn’t what you make, it’s what you have.

Wealth gives you choices. Certainly you have more choices with a $500,000 income than a $50,000 income.

But it’s only half of the picture of success.

Obviously it would be best to be a responsible steward of a high income, and be able to funnel it into serious wealth. It’s certainly doable.

But it’s not automatic.

The best way to be able to manage a large income is to be able to manage a small income.

What are you doing today to manage your money most effectively? If you’re holding out for the day when you make a higher income, you could be in for an unhappy surprise when that happens. Nothing may change.

Manage the money you have today, and only then will a higher income for you lead to greater wealth. Income is great, but wealth is the real prize.

Disagree? Let me know in the comments below.