Home Investor Psycology Understanding the difference between Income and Wealth

Understanding the difference between Income and Wealth

Have you ever wondered why your salary is called income and not wealth and if you are a businessman, then your profit is called income and not wealth. Well my question is not in accounting terms but in Financial Planning terms. Well let us understand the difference between Income and Wealth from Financial Planner’s perspective.

Difference Between Income & Wealth

Income is something with which you maintain your life style. For example, with every month’s income, we maintain our existing lifestyle and not increase it substantially.
But if you were to sell a property which you were holding from years, you find that you can afford something which you could not afford with your income. Now in that case, you have created wealth and that wealth have substantial effect in increasing your life style.

Now when we invest, do we look for income creation or wealth creation?

Obviously, you will say that we look for wealth creation and not income creation after understanding the difference between income and wealth. But mind you that wealth creation is a very BORING process. Wealth creating takes time and you need right products to create wealth.

Think of few wealthy persons you know and look at the time they must have given to create that wealth. Now-a-days, we see that farmers are getting wealthy by selling their lands which they earlier used to cultivate. But then you look at the time they have given to create such wealth.

You probably will have n number of examples of people who have created wealth in Real Estate. But do you know many persons who have created wealth by investing in Financial Asset? You may not think of many. But let me ask you that don’t you know Mr. Mukesh Ambani or Mr. Ratan Tata or Mr. Azim Premji or any other rich businessman that you know in your vicinity. They all have created wealth. Now tell me which real estate Mr. Ambani owns? Must be an absurd question for you and you probably don’t know about it.

But what you know is that Mr. Ambani owns shares of Reliance or Mr. Azim Premji owns Wipro’s shares and the wealthy businessman you know may own 100% share of his business.

What do I really want to convey?

If you find your investment exciting and you are having fun, probably you are not making wealth. We don’t make wealth out of equity because, we look at equity as income creating tool. Buy Reliance at 2000 and sell at 2100.
Now financial instrument that makes wealth is equity and you understand equity as exciting investment that goes up and down every day. And those financial instruments which create income, we make them our BORING investment FD, NSC etc. How many of you look at your Fixed Deposit daily or your PPF account balance or your RD that you have in your post office.

But you want see the value of your mutual fund investment regularly, keep watching your equity portfolio as if tomorrow you need to sell it to marry your daughter.

This is why Equity does not create wealth for most of the Indian Investor.

What happened in US in last 100 Years

GDP 1950 – 2050

India in 2020 (check where India is in 2010)

Equity is a long term BORING investment and look at equity as wealth creating tool and not income creating tool.

12 COMMENTS

  1. @hemant very good post.. readers should read in-between lines..:).. don’t you think IMF, and SC are too optimistic on india growth in terms of GDP..

    • Hi Marshal,
      You may be right that they are too optimistic – but I am trying to hint only 2 things:
      1. Equity gives best return in long run.
      2. Power is shifting from west to east & India will have a good future (if not great).
      Now people have 2 choices:
      A. Participate.
      B. Sit Outside.
      This choice will make a huge difference in their financial life.

  2. Hi Hemant ,

    Excellent Article !

    These charts looks quite impresive and after looking at them we can be at least assured that best years of Indian equity are yet to come… 🙂 ( Though we cant say same about indian cricket team 😉 )

    So best way to benifit from this growth is follow the simple rule which you have stated in your previous articles many times…
    ” Its not the timing the market but time in market that matters … :)”

    Thank You !

    Regards
    Rohan

    • Hi Rohan.
      Question is simple – Will India Grow??
      Multiple Choice
      A. Yes
      B. No
      If answer is YES participate in equity markets & If answer is NO – don’t participate.
      But once you have invested – make your investments dull.

  3. Hi Hemant
    You have beautifully explained the difference between income and wealth. Income for maintaining life style and wealth for increasing life style.But the problem is we have 95% traders and 5% investors.Even among the investors most use equity mutual funds as tax saving tools and not as wealth creation tools.Hopefully, we will have some investors who will use equity mutual funds for wealth creation once the incentive of tax saving is removed from ELSS schemes.
    Most of the investors who invest in equity mutual funds do not understand that preservation of wealth is even more important than generation of wealth.They just invest in equity mutual funds by randomly picking up some mutual funds.No thought seems to go in the construction of the portfolio for creation and preservation of wealth.

  4. well, income for daily life- livelihood is taken granted.
    savings is vital for all contingencies-
    all fluid- state, better free from taxes- recurrent deposits , it never gets its mention.
    despite risky mediclaim policies-not sure of claims settlement as of now
    Of course, it should start very early- go fully loaded & that s very much affordable.

    and life insurance is almost a mandate ,to care of the dependants,better started early

    now comes the wealth creation .
    with investment right- way preferably with FP consultants,
    not any other media who just tempt all the gullible only to reach their short lived targets
    wealth, the cream of life.
    certainly not for next generation- they only need support only till they start earning.
    to live fully, retirement planning is all too essential in those helpless grey days..

    all these equity funds – a number game, gamble, risks to taken penny wise.

    yes, ECONOMY got a rosy sketch- albeit thorns below..
    world economy- mapped has both, more of deep falls with less of slow spikes.

    As of now, its getting back to Eastern as was in the beginning, overtaken and dominated by western, its all nothing but
    a pendulum effect, seems all physical- in nature.

    • Hi GSredddy,
      Sorry for delayed response.
      I think in a single comment you have described a complete financial life. But my suggestion for everyone is that if you want to be an equity investor – be optimistic & visionary.

  5. Hi Hemant,

    It has been quite a time since I started reading your articles and now I regularly do so. Your articles are quite simple and to the point that helps me understand the complexities of the market.

    I just wanted to ask you a few things about my financial goals. I am 30 years old and have debt of Rs.50000/- (from friends and family) to be paid and a monthly income of Rs.14000/- (of this Rs.6000/- is my monthly expenses). I want to invest in market and I think it will be better to go for MFs but I have some confusion that whether I pay my loans first and then start investing or should I start investing simultaneously with repaying a part of my loans monthly. Secondly, if I invest, how long should be my investment horizon. Thirdly, what are the few good MFs in which I can invest and in what amounts, since my income isn’t much.

    regards

    deepak

    • Hi Deepak
      It is not possible to give correct advice without knowing your background.It is not clear whether you are married or not, whether you have any dependents, why you have taken loan.Even if you use your entire savings it will take you more than six months to be debt free.You should not even think of investing in market before paying back the entire amount of your loan.

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