Dave Lukas - Lessons for Hannah
135: Lessons for Hannah - The Difference Between Being Rich and Being Wealthy
Hello Misfit Nation! Welcome to another edition of "Lessons for Hannah!"
In November of 2016, we introduced a new format that we are putting alongside our regular episodes called “Lessons for Hannah.” Hannah is my daughter and one of the main inspirations for the Misfit Entrepreneur. I wanted to have a place where she could go and learn from her daddy and his Misfit friends throughout her life….even after I am gone. If you haven’t listened to the first episode of "Lessons for Hannah," I urge you to as it gives some more background and tells the amazing story of how Hannah came to be in our lives.
"Lessons for Hannah" are short, very useful, and sometimes comical lessons, that I have learned which I want to share with you and give to Hannah to help in your lives. Because I want Hannah to have these for her life, I’m going to speak as though I am talking directly to her. These episodes are a lot of fun and if you think there is a lesson that we should include in these episodes, please don’t hesitate to send it over to us at firstname.lastname@example.org. We’d love to share it.
This week’s Lesson for Hannah
I want to talk to about the difference between being rich and being wealthy. I recently wrote an article about this because many people confuse the two.
Most people, if asked the question, “Do you want to be rich?” would say “absolutely.” If you asked them if they want to make more money or be able to buy more of the things they want or live the lifestyle of their dreams, they would say “yes” as well.
But, what if I told you that this would be focusing on the wrong thing.
Most people are focused on getting “rich.” They measure their wealth by how much they make. If they have a huge paycheck and make a lot of money, they think they are rich or wealthy. Being wealthy is not about how much you make, but about how much you keep. And more importantly how long what you have kept can support you without having to get a paycheck.
Wealth, simply put, is the amount of days you can live without having to work. For example, if your bills are $5000/mo and you have $10,000 in the bank, you are 2 months' wealthy. Most people that make a lot of money are not wealthy. They are rich because they make a lot. But, they also spend a lot. In fact, if a lot of these people lost their primary source of income, they couldn't get through a month at their level of lifestyle.
If you really want to have what you want, you need to change your focus from getting rich, to getting wealthy. Part of that is understanding that getting a big W2 paycheck is the worst way to make your money because it is the highest taxed form of money. The wealthy know this. That is why Warren Buffett says he pays less taxes than his secretary - because on a percentage basis, he does. His money is made from dividends, capital gains, and distributions from his businesses, which are all taxed at lower rates than the W2 income tax rates. Remember, it's not how much you make, it's how much you keep that matters.
Additionally, the wealthy have their money work for them in the form of assets such as business ownership, real estate, and investments. This helps to ensure that they remain wealthy and never outspend their ability to be wealthy. For example, if you have 10 rental properties that pay you $1000/mo each after expenses and your personal monthly bills are $7500, you are effectively infinitely wealthy.
This is a major secret that most never realize or come to understand in their lives - so they work for a paycheck their whole life, live large, but many times have little to show for it.
Furthermore, they give up their best years in this pursuit and miss out on enjoying life to it’s fullest with the ones they love. That may be the second lesson for today and one that you have really helped me to realize as you’ve grown. It’s not about having all these things in our life. It’s about the experiences we get to share with our loved ones and that memories we create. Those are lasting. A fancy car is not. But, one thing I can say is that if you turn your focus to creating wealth and not getting rich, you can have it all. You can have the lifestyle you want, the experiences that matter, and yes, even the fancy car.
This is possible because you focus on accumulating assets that work for you and put your money to work for you instead of you having to work for the money.
I also want to address another point about wealth. A lot of people will say another way to do this is to scrimp and live way below your means. They advocate clipping every coupon, going without things like TV or a car, and spending hours upon hours to save some money. Look, saving money is a prudent thing to do and where possible you should. You don’t stay wealthy by outspending your ability to create wealth, but your goal should not be to retreat and live below your means. Your goal should be to expand your means to increase your capacity for wealth. If you ask just about everyone, no one wants to live below their means or really spend a whole Sunday clipping coupons so they can save $1.00 off a box of cereal. It’s just what they think they need to do. Instead, I encourage you (and them) to change your thinking to spend all that energy you would spend to save a few pennies on finding a way to expand your means and your wealth, so you don’t have to worry about saving the pennies. Focus on growing your wealth, your investments, your businesses, etc.
This has served me very well. Any time, your mother and I have increased our expenses in a large way, whether buying a new house or investing in an experience for our family, we have focused on creating the wealth to support it and expanding our means so that it isn’t a onetime thing but becomes a regular activity and is supported by our wealth. By putting our efforts into expanding our means, we have created entire businesses to fund a goal and those businesses have gone on to create much more for us and continue to do so today. Just remember, don’t live below your means, put your effort into expanding your means – but don’t increase your expenses until you’ve succeeded in expanding!
Hannah and for all those listening, can you see the difference between being rich and being wealthy? Can you think of a change you need to make in the way you approach money that will help you begin to build wealth and expand your means? Maybe you can set a goal to be so many days' or months' wealthy by a certain date.
Hannah, whatever you do, focus on being wealthy, not being rich!
I love you,
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