Most of us don’t make a distinction between being rich and being wealthy. It has probably never crossed our minds, but there’s a big difference between the two. You see, you can be rich without being wealthy. How?
Being rich means making a lot of money. You can be a high earner, have a big home, fancy cars, and all the trappings, but as long as you need to show up to work to pay your bills, you won’t be wealthy. The wealthy are financially independent. They don’t have to work if they don’t have to or choose not to. Doctors, engineers, lawyers, and business execs can all be rich, but as long as they’re trading time for money, they won’t be wealthy.
Being wealthy means having an alternative source of income to meet your expenses that free you from the confines of a job. Passive income from passive investment sources is the difference between the rich and the wealthy.
When your passive income exceeds your expenses, you’ve achieved financial independence. The 45-year-old retired librarian next door with passive income sources to meet all her needs for the rest of her life is wealthier than the 60-year-old doctor still punching the clock to meet all his high expenses.
Will just any passive income source do? Not any source will do.
For example, treasuries, CDs, money market accounts, and annuities are all passive income sources. Still, none of them have the three essential elements necessary for building and maintaining wealth:
- Above-Market Returns.
- Income.
- Appreciation.
Treasuries, CDs, money market accounts, and dividend stocks not only fail to beat the market, but they also can’t even keep up with inflation. And none of them offer growth from an underlying for above-market returns from both income and appreciation, look to the wealthy for a clue to the type of passive income investments they’re drawn to.
The wealthy are heavily allocated towards alternative investments, with more than half of their portfolios allocated towards two in particular: Private Real Estate and Private Equity.
- Private equity is the acquisition of stock or partnership interests in a private company – typically an income-producing business with growth potential.
- Private real estate is the indirect investment in real estate through a private real estate investment company.
Both private equity and private real estate allow investors to leverage the expertise of others to make money in industries that would require too much time, energy, and capital to learn and do on their own. Passive investing allows investors to leverage someone else’s time – making them money in their sleep.
Many people associate wealth with things and outer appearances, but it has very little to do with those things. It has less to do with active income – your high-paying day job – and more with passive income, the income you can earn 24-7.
Your profession makes you rich, but unless you can turn your labor income into passive income, you will work until you die.
Until you can generate enough passive income to walk away from your job, you will never achieve financial independence. You will never be wealthy.