Difference between Income & Wealth

Most of us have watched the silver screen beauties Parveen Bobby, Meena Kumari and great actors like A. K. Hangal, Bharat Bhushan.

They all had one similarity, they were the most celebrated and highest earning artist's of their time.

Ironically, all of them died almost having nothing to their name.

Now the question is, How is that possible? Persons with such extremely impressive income levels could die penniless?

This is because most of them did not realize the difference between income & wealth.

Income, It can be generated by your knowledge & skills but Wealth can be created only with determination, patience and passion.


Understanding the relationship between income & wealth

Let us take a case of 4 people (A, B, C & D) with the same income level

Particulars
Mr. A
Mr. B
Mr. C
Mr. D
Monthly Income
Rs. 50,000.00
Rs. 50,000.00
Rs. 50,000.00
Rs. 50,000.00
Monthly Savings
Rs. 3000.00
Rs. 10,000.00
Rs. 12,000.00
Rs. 10,000.00
Allocation
Keeps entire fund in SB Account
Keeps money in 7% bank FD
Puts in equity diversified MF
Invests in stock market (with proper fund management)
Annual CAGR
4%
7%
14%
18%
Time Frame
20 years
20 years
20 years
20 years
Total Outlay
Rs. 7.20 lakhs
Rs. 24.00 lakhs
Rs. 28.80 lakhs
Rs. 24.00 lakhs
Final Corpus
Rs. 11.04 lakhs
Rs. 52.40 lakhs
Rs. 1.58 crore
Rs. 2.34 crore
Wealth Ratio
1.53 X
2.18 X
5.49 X
9.75 X
 

In the above example we see that Mr. D created wealth 9.75 times compared to Mr. A who only could create 1.53 times his investment, despite the same income level.

 Key takeaways from the above example
    • The first step is to treat saving as target rather than a residual, while Mr. A treated savings as a residual after spending. However the other 2 managed to get the first step right saving monthly higher amounts from their income.
    • The second step is the most important and you need to tolerate the heat, to earn income you need to work hard and to convert it into wealth you need your money to work hard for you.
Key takeaways from the above article 
  • Income is a flow and wealth is a stock, the more disciplined you are and the more calculated risk you take in equities, the more wealth you are likely to generate over a longer period of time

  • Income will last as long as you are working
  • Income can be increased by working smart (believing Work Smart, not Hard) but wont make you wealthy or create wealth for you

Amit K Arora

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