There is no black and white definition for the terms ‘rich’ and ‘wealthy’, but there is one key factor that differentiates the two: mindset.
A rich person is motivated to be rich, while a wealthy person has become wealthy from motivation – two very different mindsets.
You can become rich from inheritance, acquiring a high paying job or winning the lotto. A rich status can be lost just as quickly as it was gained, and put simply it is a current financial state.
Wealth on the other hand is knowing how to acquire money, and knowing how and where to invest it to create a long-term legacy. Wealth is often described as having more than one source of income, staying with you wherever you go, regardless of certain circumstances. It is the people with knowledge, skills, passion and motivation who achieve great things and in return become wealthy.
People can take away your riches, but they can’t take away your wealth and the ultimate difference between the rich and wealthy comes down to a sustainable financial situation which all stems from – you guessed it – the mindset.
The Hedonic Treadmill Theory
A rich person’s mindset is similar to the Hedonic Treadmill Theory, which compares the pursuit of happiness to a person on a treadmill who has to keep working just to stay in the same place.
Researchers Brickman and Campbell coined the term ‘Hedonic Relativism’ which was later modified to become the current ‘Hedonic Treadmill Theory’ by British psychologist Michael Eysenck.
The theory explains as a person makes more money, their expectations and desires rise in tandem, which results in no permanent gain in happiness.
This reminds me of a client of mine, who before coming to me for property investment advice, was a prime example of someone stuck on the Hedonic Treadmill.
He was 24 at the time, a young miner in Western Australia earning well over $130K a year and coming home with nothing to show for it. He told me the more he earned the more he spent and admitted to wasting the money on depreciating assets.
He soon realised that his job would never be permanent, and the same went for the figures in his bank account. This change in mindset transformed his riches into wealth, not overnight, but steadily through a well-planned strategy consisting of better money management, investing in property and maintaining the mindset to reassess every advancement in his wealth creation model.
Walking the line between rich and wealthy
The trick to maintaining a ‘healthy wealthy’ mindset is to know when enough is enough for you. Wealth is relative, there’s no benchmark to determine how much wealth you need to be happy, but for the rich it is a never-ending pursuit.
Research conducted by the Happiness Research Institute associates a rich mindset with the old saying ‘Keeping up with the Joneses’. The research concluded that our satisfaction with what we earn depends on what other people earn and the more we compare our earnings and lifestyle to others, the lower our happiness and satisfaction drops.
When a rich mindset falls into this pursuit, it begins to produce psychological burdens, according to the 2013 World Happiness Report by John Helliwell, Richard Layard and Jeffrey Sachs. The study confirms that an exaggerated desire for wealth leads to personal unhappiness, addictions, ill health, and other psychological, social and physical burdens.
This comes back to the motivation factor - a rich person is motivated to be rich, while a wealthy person has become wealthy from motivation. For the person chasing riches, how rich will they have to be before they are satisfied? It is those who possess motivation to achieve great things that will be satisfied with what they have accomplished, rather than the wealth they have created.
Turning motivation into wealth
There are many ways in which we can channel this motivation – but it is no secret that Australians choose real estate as a main driver in their wealth creation model.
Australian Bureau of Statistics (ABS) show that as of September 2013, nearly 6 million people owned one or more pieces of real estate in Australia – that’s a whopping 25.5% of Australia’s population.
The stability of real estate compared to shares has proved a successful strategy for many Australians looking to create long-term wealth, but it takes more than just investing.
Being smart with your investments is the key to creating a successful property portfolio, and it all comes down to your strategy.
Creating your investment strategy, researching the market and choosing areas with potential positive capital growth are key factors in setting up the foundation for your journey to a wealthy lifestyle.