How much you earn does not mean how rich you are

Most of us, including me, had the impression that our wealth is defined by how much money we make. Because in school, or from the family, we learned that having a good education means more earning power. Having the right skills also brings in more income. By completing a degree, acquiring demanded skills, keep pursuing promotions, you can get bigger salaries. But it does not mean that you are richer. Why?

Because personal wealth is not defined by your income.

Imagine Peter earns $4000 per month and he tracks his spending, so at the end of the month, he spent $2000 and saved $2000.

Rachel earns $6000 per month and she lives in a nice big apartment, enjoys going out with friends and shopping, at the end of the month, she spent $5500 and has $500 leftover.

Who do you think is richer?

In a year, Peter would have $24,000 in his bank account, but Rachel only has $6,000.

Who do you think is richer?

Without any other information, in this case, Peter is richer. Because his personal wealth is $24,000, 4 times more than Rachel, even though Rachel earns 50% more than Peter.

Saving is more important.

Imagine how difficult it is to generate $200 more income per month, compared to save $200 more per month? The latter is definitely easier.

Increase saving is the easiest.

How much you save does not mean how rich you are

Now we know how important saving is, and how easy it is to increase saving compared to increase earning, no matter how small it is. Why how much you save does not mean how rich you are?

Let’s look at Peter’s colleague Tom.

Tom earns $4000 per month, like Peter, he is also cautious about his expenses and managed to save $2000 per month. But unlike Peter, Tom puts his savings into investment, a diversified ETF — Vanguard Total World.

Over the course of 5 years, Peter has now accumulated $121,206 with an average annual interest rate of 0.5% in our example.

As Tom has invested half of his savings in the ETF every month, he has now a portfolio value of $146,522, because the ETF has generated an average of 10% annual return in the past 5 years. As the world economy develops, global companies are growing, hence the performance of the world ETF is growing.

Tom has benefited from the growing economy through his investments. Peter has not because his money is sitting in the bank and earning him a 0.5% interest rate.

How much you save does not mean how rich you are. Investing can grow your wealth not only saving.

The One Skill That We Don’t Learn School but Costs Us a Lot of Money

In the above examples, you can see that saving and investing play an important role in building your wealth, hand in hand. You can only save so much from your income, you can earn only so much from the interest rate. But if you start investing, you can participate in the markets’ development, the success of listed companies. In long term, you are building up your wealth much faster than let your money sitting in the bank.

Money skill is so important that we don’t learn it in school. Unless your family consciously educate you from a young age, most of us do not learn it anywhere. As a result, as time goes by, we lost so much money that we could have had through saving and investing.

Rachel has $30,301 in her bank account after 5 years with a 0.5% interest rate, much less than Peter and Tom. If she has learned the money skill, with the earning she has, she could have saved and invested a minimal $2000 or more per month. 5 years later, she would have a minimal $146,522 in her portfolio. The difference between the two scenarios is $116,221, an opportunity cost, she could have avoided.

How rich you are is not defined by how much you earn nor how much you save, it is your total net worth that defines your wealth.

The one skill that we don’t learn in school but costs us a lot of money — is the money skill.

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