One of the somewhat nebulous concepts in personal finance is that of wealth.

Are you rich because you earn a big salary? Because we live in a big house? Because we drive European vehicles and send our children to private school?

Many years ago, American researchers Thomas Stanley and William Danko wanted to study the habits of people who had a net worth (assets minus debt) of more than a million dollars. They wanted to know how millionaire Americans worked, spent and saved.

To conduct their study, they did what we all would have done: they traveled across the United States to meet people who lived in upscale neighborhoods.

But they discovered something strange.

Wealth, the authors write, is not the same thing as income. The person who has a large income, but spends it all, does not get rich.

Stanley and Danko realized that the majority of American millionaires live in middle-class neighborhoods. They most often drive Fords or Toyotas – vehicles that were paid for in cash, and have a few years of wear and tear. Most of them do not own a boat, and very few valuable jewelry.

“The majority of millionaires live well below their means,” Stanley and Danko write. Unfortunately, most people believe they are imitating the rich by immediately spending every unexpected influx of money. »

I see you coming. “Yeah, but sports stars? These people are making millions. They are rich ! »

Not necessarily.

To explain it, I like to use the analogy of the bucket and the aqueduct.

Earning a salary means using a bucket to fetch water from the river. If you earn a big salary, you can carry a lot of water in your bucket. And if you earn a small salary, your bucket is not very big, and you carry little water.

To get rich is to build an aqueduct. Once your aqueduct is completed, you no longer have to move: the water will come to you.

Several sports stars carry huge buckets of water. But few take the trouble to build an aqueduct.

A Sports Illustrated article reported several years ago that 78% of NFL players and 60% of NBA players face serious financial difficulties after retirement. For what ?

Players overestimate the length of their professional career, which often ends after a few years. They underestimate their tax bill. They have a penchant for highly visible expenses (houses, vehicles, etc.), invest poorly and often experience financial difficulties following a divorce.

Last year, Golden Knights goalie Robin Lehner and his wife filed for bankruptcy in Nevada, claiming they owed $50 million to more than 50 creditors.

Yet three years earlier, Lehner signed a five-year, $25 million contract with the Knights. He should have been rich!

But a taste for luxury – including a collection of rare snakes valued at 1.2 million – as well as investments gone bad, decimated his fortune.

The lifestyle is easy, that’s what we see. Wealth is more difficult, it’s what we don’t see.

In The Way to Wealth, his book published in 1758, self-taught inventor and politician Benjamin Franklin wrote:

“The path to wealth, if you wish to take it, is as simple as the path to the market. It comes down to two words: industry and frugality. Don’t waste your time or money, but make the best use of both. He who honestly gets all that he can get, and saves all that he can save, will certainly become rich. »

In fact, from our twenties, we do the opposite. We are increasing our lifestyle faster than our income. And so, even though our income doubles and triples over time, financial stress never goes away. On the contrary, it is increasing.

The only way to break this cycle is to have a heart-to-heart with your ego.

Financial author Andrew Hallam has a good definition of wealth. “If you own investments that pay you an income each year without working that is twice the median income where you live, you are rich,” he writes in his book Millionaire Expat.

If we follow the 4% rule, which shows that we can disburse 4% per year from a portfolio of diversified financial investments without risking running out of money for 30 years, this would mean that we would need financial assets ( therefore excluding the main residence) of 2.9 million to be considered rich in Quebec according to this definition.

What can we learn from the difference between income and wealth?

I notice that our eye is a very poor guide in determining someone’s financial health. Access to credit for things like a vehicle, home improvements, and travel makes “looking rich” easier today than at any time in history.

Also, wealth can often be more difficult to achieve for a lawyer than for a plumber. For what ? Because the lawyer may feel the pressure to “keep up appearances.” Luxury car, chalet, restaurants, tutor for the children: all this eats up a large part of the income.

The plumber does not have to keep up appearances. No one cares about their house or their vehicle. This gives him the opportunity to save more of his income. And potentially get rich faster and have much more flexibility with your career, and ultimately experience less financial stress.

Author Morgan Housel summed it up when he wrote: “When most people say they want to be millionaires, what they really mean is ‘I’d like to spend a million dollars.’ . Which is literally the opposite of being a millionaire. »