Wealth encompasses the total value of all of the assets you own, whereas income refers to money earned on a regular basis from sources like salaries, dividends and interest. Understanding the difference between wealth and income, as well as how each affects your overall financial situation and goals, can help you create a financial planning or retirement strategy that works for you.
A financial advisor can also help assess your wealth vs. income strategies so that they align with your specific needs and goals.
What Is Wealth?
Wealth is the total value of all of the assets owned by an individual, minus any debts or liabilities. It includes the money you have in the bank, as well as tangible and intangible assets such as real estate, stock and bond investments, retirement accounts, collectibles and other alternative investments, and even businesses. This value represents your accumulation of resources over time, and reflects your long-term financial health. It also indicates what you have available for future growth, security and enjoyment, depending on your financial goals and current stage in life.
The value of your home, minus the amount remaining on your mortgage, is an easy and tangible example of wealth. As your home appreciates in value, your wealth grows. Another example is an investment portfolio, which can grow over time as it compounds annually. While these assets don’t provide immediate income, they can help grow your wealth over time.
What Is Income?
Whereas wealth often focuses on long-term growth, income refers to the flow of money that supports a person’s day-to-day expenses and short-term financial goals. For the average person, income typically comes in the form of wages or a salary earned through employment. But income can also come in the form of interest, dividends, rental income, or business profits.
For example, a software engineer earning an annual salary might receive $80,000 a year in regular income that helps them cover living expenses such as housing, utilities and food. This income also serves as the foundation for budgeting, saving and working towards building future wealth.
Interest earned from bonds or savings accounts are other common sources of income. And so is the quarterly dividend payments that you can receive from the shares of an investments. This example can provide you with a steady stream of income that won’t require the sell of an underlying asset.
Wealth vs. Income Examples
Let’s take a look at an example of wealth appreciating over time and generating income. An investor has a second home that doubles as a vacation rental. They purchased the home for $300,000, but a decade later, it’s worth $500,000. Additionally, they rent out their second home throughout the year when they are not using it, generating an average of $2,000 a month in rental income.
In this example, the investor’s wealth in terms of the home would be the home’s current value minus the amount remaining on the mortgage. The investor’s income would be the $2,000 in monthly rental income. Combining the home’s appreciation in value with the monthly rental income can help the investor build substantial wealth over the long term while receiving immediate income to either cover current financial needs or reinvest to build more wealth for the future.
A portfolio of dividend-paying stocks serves as another example of wealth and income working together. You would not only be receiving regular dividend payments, but you would also be accumulating wealth as the underlying shares appreciate in value. As with our real estate example above, the dividends could either be used for immediate financial needs, or reinvested in the form of additional shares in the company’s stock, which would build more wealth in the event you choose to sell the underlying shares in the future.
Bottom Line
While income is important for ensuring your current financial needs are met, building wealth helps prepare for the future, such as financial stability and retirement. Understanding wealth vs. income and how both play a part in shaping your current financial situation and future can help investors create a plan to reach their goals.
Wealth and Income Tips
- A financial advisor can help you develop both wealth and income strategies. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re looking to start building an investment portfolio, SmartAsset’s free investment calculator can help you estimate your return and growth.
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