Not all types of monetary wealth are created equal. There are two basic types of wealth, income statement wealth and balance sheet wealth.
Income Statement Wealth
Many people with a high paying job, such as a doctor or a lawyer are what I call income statement wealthy. Individuals in high paying professions make a lot of money from a job by trading time for money. As long as they continue to work, they have a great income and lifestyle.
However, too many income statement rich people live a life of conspicuous consumption, which projects their status to the world around them. They drive expensive cars, wear expensive suits, and belong to country clubs because that is what income statement rich people do. Most income statement rich people project their wealth but are often “All hat and no cattle”, as the saying goes.
As a result, being income statement rich does not provide true income security unless the person lives a frugal lifestyle, and invests every dollar they can in a quest to become balance sheet rich. As many income wealthy people discover when they become injured, sick or lose their job, their high consumption lifestyle becomes an albatross around their neck that often leads them to financial ruin.
Balance Statement Wealth
In contrast, there are those who I call balance sheet rich. The balance sheet wealthy became rich because they are frugal, and rarely live a conspicuous consumption lifestyle.
Many balance sheet wealthy individuals come from the ranks of successful entrepreneurs. Entrepreneurs can often achieve balance sheet wealth because as business owners they get paid twice- once from their effort in the form of wages or salary, and second in the form of dividends or distributions from the equity of their business. This second form of payment is often used to make other investments or kept in the business as retained earnings that can aid the company’s growth, or can be tapped when needed to cover unforeseen expenses.
This is because salary and income from an investment while both money have different mental associations. Salary pays for your lifestyle while income from and investment is considered just that an investment that should not be spent for consumption.
Balance sheet wealth can also come from high wage earners if they allocate a portion of their salary toward investments. A high wage-earner that is balance sheet wealthy often eats at home, contributes the maximum amount to their 401k or other retirement plans, and keeps their overall expenses low so they can invest every dollar possible.
Overall, the balance sheet wealthy live a more frugal lifestyle and invest their discretionary income so their money can make them more money.
Balance sheet wealth provides far greater security than income statement wealth. If a balance sheet wealthy person loses their source of future income, they have their savings and investments to generate income for them. Many entrepreneurs that have a successful exit use the proceeds of the sale of their business not for consumption but as an investment to become balance sheet rich.
Millionaire Facts
Still not convinced? According to the authors of the Millionaire Next Door, people that look like millionaires generally are not. You might be surprised by the following millionaire facts.
Over two-thirds of all millionaires are self-employed. While self-employed people make up less than 20 percent of all workers in America, they account for almost 70 percent of the millionaires. The rest of the millionaires are mostly made up of high-wage earning professionals, such as doctors, lawyers and accountants.
Many millionaire entrepreneurs operate non-glamorous businesses such as auctioneers, pest control, or paving businesses.
They have an average household balance sheet net worth of $3.7 million, but live in homes valued in the low $300k range. They do not drive new or expensive automobiles. In fact, the vehicle owed by many millionaires is a Ford pickup truck and not a Bentley, Mercedes, or another luxury brand.
According to the millionaire next door, most got to be millionaires because they didn’t spend money on luxury items, choosing instead to invest about 20 percent of their household income.
It is clear that income security comes from being an entrepreneur and living below your means so you can invest your discretionary income to become balance sheet wealthy.
What are your plans to become balance sheet wealthy?
