Building Real Wealth: Understanding How Money Creates Financial Freedom
Are you working hard but still feeling financially stuck? The difference between struggling and thriving sometimes comes down to understanding four key money concepts that many people confuse.
Good day! I hope this post finds you well.
In my years as a financial educator and coach, I've noticed that many people think of all dollars as essentially the same. They classify everything as either "money coming in" or "money going out" without considering what truly builds lasting financial security. This simplified view might be holding you back from achieving your financial goals.
Let's break down what each of these four critical concepts really means and why understanding them is essential for your financial future.
What is Income?
According to Investopedia, income is the amount of money, property, and other transfers of value received over a set period of time by individuals or entities as compensation for services, payment for products, returns on investments, pension distributions, gifts, and myriad other transfer of value.
In short, income is all the money that flows into your life over a specific period. It's more than just your paycheck.
Income includes:
Earnings from your job (salary, wages, contract or gig work)
Returns on investments (interest, dividends, capital gains)
Pension or retirement distributions
Gifts of cash or items that can be easily converted to cash
Money from selling personal possessions
Many people only think of income as what they receive from their employment. But that is leaving money on the table (heh heh). Recognizing that you can bring in income in multiple ways gives you a clearer picture of your financial situation. Further, it’s important to recognize that income ebbs and flows over time, much like water flowing through a river.
Remember this key insight: A high income doesn't automatically translate to wealth. Some high-income earners live paycheck to paycheck because they spend everything they make.
What is Wealth?
Wealth is distinct from income. Going back to trusty Investopedia, wealth is the value of all the assets of worth owned by a person…Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts.
While income is water flowing through a river, wealth is a reservoir that you've built. In simple terms, wealth is what you own minus what you owe.
Wealth is measured at a specific point in time—it's a financial snapshot. Unlike income, which represents a flow over time, wealth represents what you've accumulated and preserved at a specific point in time.
Common forms of wealth include:
Cash savings
Home equity
Investment portfolios
Business ownership
Valuable possessions
Wealth-building is a long-term process that typically involves consistently setting aside a portion of your income and investing it wisely. This is where many people struggle—they focus on increasing income (or more frequently, decreasing expenses) without developing the habits that build wealth.
It's also worth noting that our perception of wealth is relative. We tend to measure our wealth against those around us, which can lead to unhealthy financial comparisons and decisions. Don’t aspire to “keep up with the Joneses.” Instead, figure out what financial security means to you and work towards achieving that goal.
What are Expenses?
Household expenses represent a per-person breakdown of general living expenses. They include the amount paid for lodging, food consumed within the home, utilities paid, and other costs.
Expenses are what you pay for goods and services that don't increase in value or generate future income.
Your typical expenses include:
Housing costs (rent or mortgage)
Utilities (water, electricity, heat, internet)
Food and groceries
Healthcare
Transportation
Insurance premiums
Debt payments
Entertainment and leisure activities
Most people cover their expenses with income earned from their labor. The challenge arises when expenses consume all—or more than—your monthly income. This creates a cycle where you're constantly working just to stay afloat, with nothing left to build wealth.
This is the treadmill that keeps many hardworking people financially vulnerable. When all your income goes toward expenses, you have nothing left to invest in wealth-building activities that will enhance your financial security.
What are Investments?
Going back to Investopedia one last time, an investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
The critical distinction here is intent—you don't purchase an investment to consume it, but instead you use your dollars to create wealth over time. This is where the real transformation happens in your financial life.
Typical investments include:
Real estate (that appreciates in value)
Retirement accounts
Taxable stocks, bonds, and mutual funds
Business ownership
Education that increases your earning potential
The fundamental difference between an expense and an investment is that an expense takes money out of your pocket permanently, while an investment has the potential to return more money to you than you initially put in.
This is the wealth-building secret that financially secure people understand: directing a portion of your income (no matter the amount) toward investments is how you build wealth incrementally over time.
Why These Distinctions Matter to Your Financial Future
The path to financial security requires shifting how you think about and handle your money. If you're using all your income for expenses, you're missing opportunities to build wealth through investing.
Making the shift from spending to investing is challenging—especially when you are facing high living costs and/or not earning enough. Focusing on daily financial survival can keep you from planning for long-term security. This is precisely why understanding these distinctions is so important.
Here's the reality many of the people who I work with face:
They earn income through their labor
They use that income to pay for expenses
They have little or nothing left for investments
Without investments, they don't build wealth
Without wealth, they remain dependent on their labor income
Breaking this cycle requires reflection and revised intentions about where your money goes.
Steps Toward Building Wealth
Track every form of income. Know exactly how much money is coming in from all sources.
Categorize your spending as either expenses or investments. Be honest about which purchases are expenses versus which one are investments that will grow in value or generate income.
Work to get to a place where your income exceeds your expenses. Remember that even small amounts of money set aside consistently can grow significantly over time.
Start investing early and regularly. The power of compound growth works best with time.
Protect your wealth-building capacity. Be mindful of the threat of “lifestyle inflation” as your income increases by directing additional funds to your investments.
Creating financial security through wealth building isn't just about budgeting better—it's about fundamentally changing your relationship with money by understanding these four distinct concepts.
The Bigger Picture
We must also acknowledge that while you have a role to play in making positive choices around your finances, larger systemic factors affect your ability to build wealth. I believe that policies promoting things like affordable housing and comprehensive healthcare would help free up more money for working households to invest in appreciating assets like homes, businesses, or retirement funds.
Your Financial Journey
Ask yourself:
Do you clearly understand the difference between income and wealth?
Can you identify which of your spending choices are expenses versus investments?
What small step could you take today to start building wealth?
Share your thoughts with this insightful and supportive (and did I mention good-looking?) community, either in the Comments below or on LinkedIn.
Ready to Transform Your Financial Future?
If you're tired of working hard on your finances with little progress to show for it, it's time for a different approach. Understanding these four concepts—income, wealth, expenses, and investments—is a solid first step toward genuine financial freedom.
Schedule your complimentary 15-minute Design Call with me today. We'll identify your biggest financial obstacles and create a personalized path toward building lasting financial security. Your future self will thank you for the decisions you make today.