Some of your friends might be rich, but are they wealthy? What’s the difference between rich and wealthy – or are they the same thing? Do you want to be wealthy, or would you rather be rich?
Simply put, rich people use their money to buy things, and wealthy people use their assets. Let’s use an example further defining and illustrating this concept.
While at lunch, Dr. Richy and Dr. Wealthy start talking about cars. They are both in the market for a new car and have decided to approach the decision to purchase a vehicle with different goals in mind.
Dr. Richy is going straight to the Cadillac dealership to purchase a brand-new 2023 Escalade. The price tag is $125,000, and the doctor pays $25,000 down and finances the rest over 60 months for a monthly payment of $2,000.
Dr. Wealthy loves the new Escalades but shops for a deal and finds a used SUV for $25,000.
However, while shopping for cars, Dr. Wealthy sees an RV camper van for sale for $100,000. It’s in great shape, so the doctor calls their banker, who finances the total amount for 60 months for a monthly payment of $2,000.
Now let’s fast forward 60 months.
Dr. Richy makes the final payment. Their ($125,000) Escalade has a Blue Book value of $45,000, and Dr. Wealthy’s ($25,000) SUV is now worth $10,000. However, it would be a shame to end the example here. What about Dr. Wealthy’s camper van?
After Dr. Wealthy discovered the van, they called their CPA, who advised the doctor to set up an LLC for the camper van. Their banker set up a separate bank account for the LLC, and their CPA set up a QuickBooks file to manage the business. Dr. Wealthy lives near five national parks and knows these vans are in demand.
During these 60 months, they rented out the van on the site, Outdoorsy, for an average of 20 days every month at $300 per night. After expenses related to renting the van and making the payment, the doctor made $3,000 in profits every month. The business balance sheet reads $180,000 in cash and zero debt at the end of 60 months.
The two doctors, together at lunch again, are talking about cars. Dr. Richy is excited since the new 2028 Cadillac Escalade has just arrived at the dealership. They are heading to the dealership to trade in their vehicle.
Dr. Wealthy, on the other hand, upgrades their car and pays $80,000 cash for a brand-new GMC Yukon. The doctor also finds another camper van for $75,000 and invests $25,000 to upgrade their current van – paying for everything ($180,000 worth) in cash from their side business bank account.
Now the van is featured on Outdoorsy, and business is booming. After expenses (and no loan payments), netting $8,000 monthly, the business bank account is growing again.
After going for a ride in their friend’s new Escalade, and knowing they have built up enough wealth to purchase one without straining their cash flow, the Wealthy buy one for the doctor’s spouse. They use $2,000 from their business’s monthly net profits ($8,000) for the monthly payment with ease.
Fast-forward another 60 months. Dr. Wealthy still has zero debt and $360,000 in the bank account, while Dr. Richy is making a final payment and looking at a near-zero bank account balance.
Dr. Wealthy continues building wealth and uses it for the cash flow to purchase new assets. On the other hand, Dr. Richy keeps draining their monthly cash flow by making monthly loan payments and wondering why there isn’t any money in their savings account. This scenario happens over and over again.
Which path will you take? Which direction will you take your cash flow? The road to things or the road to wealth? Make 2023 the year you stop chasing riches and start building your wealth.
Surrounding yourself with advisors like a CPA and financial planner can make this journey more manageable and a reality in the long run. These advisors can be a part of your investment in wealth building instead of simply a monthly expense, and they pay for themselves several times over.
Happy New Year!