There is a major difference between wealth and net worth in relation to income

There are many myths about wealth, but one seems to persist: The idea that income is equal to wealth.

"This continues to be badumed by those who increase their consumption as their income rises," writes Sarah Stanley Fallaw, director of research at the Affluent Market Institute, in her book The Next Millionaire Next Door. : Enduring Strategies for Building Wealth, in which she surveyed more than 600 millionaires in America.

She added, "And by believing that this myth gives the false impression that those who seem wealthy (neighbors driving luxury cars or friends wearing jeans over $ 200) are wealthy while it simply means that they are not. they spent more than real millionaires on these purchases. "

White point, income and wealth are not the same thing.

Wealth refers to a household's net worth, that is, all of its badets, minus all liabilities, Stanley Fallaw explained. Household income is simply a realized income to be reported in the personal income tax return.

Even the Tax Foundation is mistaken, referring to "millionaires" in terms of tax returns in relation to their net worth, said Stanley Fallaw. In reality, the income of a millionaire represents only 8.2% of its wealth, she discovered through her research.

This myth is problematic, Stanley Fallaw added, because it "distorts" the numbers that people focus on when they are trying to achieve financial independence.

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Wealth does not depend on how much money you make or how much you spend, but how much money you keep

"When people say they want to be rich, they want to spend like rich people, they want to earn a big salary," said Chris Reining, a millionaire who retired at the age of 37. , previously told Business Insider.

"But it's not the definition of being rich," Reining said. "The definition of being rich, is to have badets generating higher income than your standard of living."

"Someone who earns $ 50,000 a year while he sleeps through dividends and investment earnings and spends $ 40,000 a year – they are rich. I have friends who earn half a million, and with private schools, second homes and expensive lifestyles, nothing in their bank account – they are poor. This is why the "rich" do not have much to do with the scale of the salary. "

Business Insider Lauren Lyons Cole, a Certified Financial Planner (CFP), also found that most people incorrectly defined wealth based on the amount of money they spend and not the amount of money they spend. They had in their bank account.

Read more: After 10 years as a financial planner, I realized that almost everyone was wrong about money

"Things are not worth the money, yes, and it's not the same thing," she wrote. "I've worked with teachers with larger savings accounts than doctors who earn five times more per year." "High wages can generate wealth, but not if you spend up to three years." the last penny of luxury car purchase or if you fill the closet with brand name clothes. "

According to several studies, many millionaires earn above average incomes, largely because of their goal – oriented state of mind and hard work, which can be a solid career path. But even the high income can live paycheck.

That's what they do with their income to create wealth that makes them rich; they have enough perseverance to avoid the "drift of the lifestyle", the tendency to spend more when you earn more, and therefore to spend below their means. This leaves enough money to commit to saving, which ultimately increases net worth.

As Stanley Fallaw puts it, while income and net worth are related factors, "each should be used in different ways to badess overall financial health and progress."