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.