Understand the Difference Between Wealth And Income For Financial Security

Key Takeaways:

• Income is the money you earn in the form of wage, salary, profit, or commission. 

• Wealth is when you direct your income to secure your financial future. 

• Income provides you with the means to address immediate expenses, while wealth appreciates over time and provides long-term security.

After earning a steady income, the next step is to use that money wisely. By focusing on building wealth, you can not only address any financial emergency but also live life to the fullest in your golden years after you retire. Wealth can also help you give the next generation a better future.  To get started, comprehending the difference between wealth and income is the key. 

You may often use the terms wealth and income interchangeably, but they represent distinct financial concepts. While income fuels your day-to-day life, wealth provides the cushion and opportunities for future growth. 

It refers to any money you earn in the form of wage, salary, profit, or commissions against providing any product or service. It can be a fixed amount for employed individuals but may be variable for the self-employed. 

Any amount that you receive within a period, usually a month, is considered income. This amount can be used to meet everyday requirements and maintain a lifestyle, such as bill payments, shopping, medical experiences, rent, etc.

Examples of Income Sources

Under the Income Tax Act, there are 5 sources or heads of income. These include: 

• Income from Salary: This is a contractual amount that you receive from your employer against fixed hours of work.  

• Income from House Property: This is the sum you receive by renting out any property or land.  

• Income from Profits and Gains from Business or Profession: This is income you earn by selling a product or providing any services to clients. 

• Income from Capital Gains: This is the profit you get from the transfer or sales of any investment, such as stock, gold, property, bonds, mutual funds, etc.

• Income from Other Sources: This includes all the other income sources that are not included in the above heads, such as interest on bank deposits, rent on plant and machinery, lottery, dividends, etc.  

In layman's terms, it is all the savings and investments combined. Wherever you direct your income to secure your financial future, it is called wealth. 

It includes all the funds in a bank account, investment in tangled goods, like gold, art, land, jewellery, and intangible products like bonds, EFTs, stocks, etc. 

How is Wealth Calculated?

Also called net worth, the formula to calculate wealth is straightforward. Simply calculate the sum of all your asset values and liabilities. 

Liabilities include ongoing loans, taxes, funds that you plan to spend, upcoming expenses, etc. After calculating these values, simply subtract liabilities from assets. 

Net Worth Formula = [ asset 1 + asset 2 + asset 3 + ….] - [ liability 1 + liability 2 + liability 3 +...] 

To understand the concept of wealth vs income, focus on two factors:

Stability vs Cash Flow

Wealth provides a degree of financial stability. It acts as a safety net, allowing you to weather any financial storms. Income directly relates to cash flow. It's the inflow of money that allows you to:

• Cover your expenses

• Pay bills

• Make day-to-day purchases

Long-Term Security vs Short-Term Gains

Income is typically received on a regular basis and provides the funds to cover immediate expenses. This is why it is related to short-term gains. 

On the other hand, wealth appreciates over time and is intended to provide long-term security.

Depending on income to meet all your financial goals is not enough. One needs to build wealth in order to effectively manage finances and meet long-term goals. 

Income only provides monetary support to keep a person afloat, while wealth provides a hedge against inflation. Calculating the quantum of wealth vs income can also help policymakers compute the gap between classes. They use this data to improve the condition of citizens. 

1. What is the difference between wealth and income?

In simple terms, the total value of assets, income, and savings combined is calculated as wealth. On the other hand, income is the monthly earnings from different sources of an individual. Some wealth vs. income examples include the following: 

• Income: Salary, investment returns, capital gains, etc. 

• Wealth: Net investment value, property, gold, stocks, etc. 

2. Can you be wealthy without a high income?

Building wealth requires smart investment, savings and spending frugally. While high income can accelerate wealth building, it is possible to build wealth even without it. You need to have discipline and good financial management skills. 

3. Which is more important for financial security, wealth or income?

Income leads to wealth if you have discipline and smart money management skills. Without high income, you will have to work with a tight hand to become wealthy. Thus, you need to create a balance for financial security. 

4. How can someone with a low income build wealth?

The following tips can help you build wealth even with low income: 

• Invest periodically according to your risk appetite

• Have a budget and stick to it

• Don't borrow what you can't repay

• Invest regularly for the long-term 

5. Why is understanding wealth vs income important?

aFocusing on earning a steady and substantial income can help you live comfortably for a short while. Understanding how wealth differs from income can help ensure financial stability and long-term security for you and your family.

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