WEALTH vs. INCOME: They are not the same thing.
Income is the money you earn. It can come from your job, a business, rental property, or even investments. It’s what comes in each week, month, or year — like your paycheck or dividends.
Wealth is what you own. It’s the value of your assets — your home, savings, retirement accounts, investments, and any other things of value — minus what you owe (your debts).
Why They’re Not the Same
A family can have a high income and still not have wealth, especially if that family spends everything they earn or carries a lot of debt. On the flip side, a family might have modest income but still build wealth over time by saving, investing, and avoiding unnecessary debt. Income is a tool that can help you build wealth, but wealth is what lasts — and what can be passed down from one generation to the next.
Understanding wealth is key; what it is, how it is produced, how it is maintained, and how it is grown. Don’t confuse income and wealth. Income can end with a dismissal notice or a change in interest rates. Don’t confuse wealth with the current price of an asset. People get carried away with prices, up and down. (See Ron’s Basic Maxims.) Think of assets as productive or as consumable. Productive assets include a person’s own abilities (which can be increased through education), owning a piece of a productive business (either private or public), and lending money to other productive people. Not much else qualifies—wealth depends on the extent to which you are involved in a productive enterprise. Think of farmland; if cultivated, it is productive; if it lies fallow, it is not. Family assets should be treated as the family farm and create wealth generation after generation.
Each Generation Shares the Responsibility to Help Create Family Wealth
Generational Wealth comes from maximizing and optimizing the productive capacity of your family assets. Make more, spend less, invest the difference. Use tax-advantaged vehicles to the extent they are available, like:
- 401(k)
- Roth IRA
- Traditional IRAs
Hold family meetings periodically to discuss who is doing what and who needs help. Not all the personal financial information must be disclosed; just talk about general principles of financial planning, saving, and investing. Information and ideas can be discussed and passed down (and up) the generational ladder. Muhlenkamp is here to help facilitate these discussions and clear up any confusion regarding the benefits and liabilities of wealth vs. income for you and your family.
The Bottom Line
Income pays the bills today. Wealth builds the foundation for tomorrow — and for generations to come. And Muhlenkamp is here to help you build that future.
The opinions expressed are those of Muhlenkamp and Company and are not intended to forecast future events, guarantee future results, or offer investment advice.
Investing involves risk. Principal loss is possible.
