The Difference Between Looking Rich and Being Wealthy

There is an old Texas expression that describes someone who puts on a big show but doesn’t have much substance behind it: big hat, no cattle.

The expression has become associated with one of my favorite books about wealth, The Millionaire Next Door, and it perfectly describes something we don’t talk about enough when it comes to money: there is a very big difference between looking rich and actually being wealthy.

We’re not going to talk about giving up your morning coffee. We’re not going to talk about never buying another pair of shoes. And I’m certainly not going to tell you that financial freedom is waiting for you if you stop spending five dollars at Starbucks.

For Christ’s sake, coffee is not making you broke.

What may be keeping you from building wealth is something much bigger: the amount of money we spend maintaining a lifestyle that looks successful instead of using some of that money to actually become financially independent.

I’ve spent a lot of my life around people with really big hats. Maybe you have too.

They live in our neighborhoods. Their children go to school with our children. They’re driving the luxury SUV, buying the new house, putting the kids in private school, joining the club, taking the vacation, carrying Gucci on their arm and sending their children to the $10,000 summer camp.

Meanwhile, you’re standing at your kitchen counter making PB&J sandwiches for your public-school kids after getting five hours of sleep because you’re balancing school, work, children, a mortgage and life, wondering how in the hell everyone else seems to have so much money.

Here’s the problem: you have absolutely no idea whether they do.

What you’re seeing is consumption.

You can’t see their balance sheet.

You don’t know the mortgage balance. You don’t know the car payment. You don’t know the credit-card debt. You don’t know whether the boat is financed. You don’t know whether they’re saving anything for retirement. You don’t know whether that handbag was paid for in cash or will still be collecting interest six months from now.

We make a whole lot of assumptions based on a whole lot of visible consumption.

Wealth, however, is largely invisible.

I may not have a lot of hats, but I’ve got some cattle—and I want more women to start wanting the cattle too.

Rich and Wealthy Are Not the Same Thing

One of the first things we need to do is separate two concepts that are frequently used interchangeably.

Income is what comes in. Wealth is what stays.

You can earn $500,000 a year and spend $550,000. You may look extraordinarily successful, but you don’t have cattle. You have an expensive lifestyle that requires an enormous amount of income to maintain.

That’s an important distinction because when your entire standard of living depends upon your next paycheck, you have very little room for disruption.

You can’t easily leave the terrible boss. You can’t easily take six months off. You can’t easily change careers—particularly when you’re a high earner whose lifestyle has grown alongside your salary. Starting a business becomes riskier. Taking time away from work becomes more difficult. Saying no to an employer becomes much harder.

Your income may be impressive, but your choices are limited.

That isn’t the kind of wealth I’m interested in.

When I talk about wealth, I’m talking about financial independence—the accumulation of assets that increasingly gives you control over your time and your decisions.

For purposes of this conversation, I’m going to use $5 million in financial and investable assets outside the equity in your primary residence as my personal definition of wealthy. This isn’t an official financial definition. Economists, financial planners and individuals will define wealth differently. I’m deliberately setting the bar around assets that can potentially support your life rather than the value of the house you happen to live in.

If you already have $5 million sitting in financial and investable assets outside your primary home, congratulations. Shut your phone off. You probably don’t need me today.

For everyone else, let’s talk about building some cattle.

What I Wish I Had Understood Earlier

I spent decades of my career working incredibly hard. There were bad bosses, terrible companies and incredibly long hours. There were years when work received a disproportionate amount of my energy because I believed that’s what success required.

There are things that money cannot buy back.

I can’t go back and experience my youth differently. I can’t reclaim parts of my firstborn’s childhood that happened while I was building my career.

I’m not saying this because I think women shouldn’t have ambitious careers. I’m extraordinarily proud of what I’ve accomplished professionally. A successful career can be one of the greatest financial engines you ever build.

What I wish I had understood much earlier was the importance of building independent sources of income and wealth alongside my career.

The objective shouldn’t simply be to keep increasing your salary so you can keep increasing your lifestyle.

At some point, the objective needs to become reducing the amount of your life you are required to sell in order to maintain that lifestyle.

That’s an entirely different financial goal.

I can’t go backward and change how I did it, but I can change what I do with the time I have left on this big, beautiful ball.

And so can you.

It is never too late to begin moving in a different direction.

First, Figure Out What You’re Actually Worth

Before changing anything, you need a starting point.

The Millionaire Next Door introduced a simple rule of thumb for estimating expected net worth based on age and income:

Age × annual pre-tax realized household income ÷ 10 = expected net worth

So, for example, if you’re 30 years old and earn $100,000 annually:

30 × $100,000 ÷ 10 = $300,000

Under this formula, $300,000 would be your expected net worth.

Don’t panic if you’re nowhere near that number. This is a benchmark, not a perfect financial-planning formula, and it can be particularly aggressive for younger people who haven’t had decades for their investments and retirement savings to compound.

What I find much more valuable is the question the exercise forces you to ask:

What do I actually have to show for the money I’ve earned?

Not, What do I own?

What am I worth?

We are surprisingly comfortable telling people what we own. We talk about the house we bought, the car we drive, the vacation we’re taking and the things we’ve accumulated. Yet many people have never actually sat down and calculated their own net worth.

It’s relatively straightforward.

Add up your assets: cash, investments, retirement accounts, business interests, real estate equity and other assets with financial value. Be realistic, particularly when estimating home equity. What you hope your house is worth and what someone will actually pay for it aren’t necessarily the same number.

Then subtract your liabilities: mortgage debt, car loans, credit-card balances, student loans, personal loans and anything else you owe.

Assets − liabilities = net worth.

And yes, we’re looking for a positive number.

Once you know where you’re starting, you can begin moving the puck.

Step 1: Stop Buying Things That Make You Look Wealthy and Start Buying Things That Build Wealth

This doesn’t mean you can never buy another nice thing.

I like nice things. I buy nice things. I also look for quality and a discount, and I rarely pay full price for anything.

I don’t believe financial independence requires living miserably for 40 years so you can finally enjoy yourself when you’re 75.

Instead, before making a significant purchase, I want you to start asking two questions:

Does this purchase increase my freedom or increase my obligation?

And:

Can I get what I want in a different way for less?

Those are very different questions from, Can I afford the payment?

I see people make financial decisions based almost entirely on monthly payments. If the payment fits into the budget, they decide they can afford the purchase.

I want you to flip that thinking around.

How much freedom is the purchase going to give you—or take away from you?

A bigger house may increase your obligations. Do you actually need the additional space, and what will it provide that your existing home doesn’t?

A luxury vehicle may come with a significant payment, higher insurance and faster depreciation. Is that trade worth making?

Instead of a $1 million house on the perfect street, could you buy an $850,000 house a few streets away in the same school district and invest the difference?

Instead of buying the $75,000 car, could you buy the $50,000 car and put $25,000 into investments?

Instead of buying brand new, could you buy something a year old?

You’re not necessarily giving up what you want. You’re learning to get what you value while preserving more of your money for assets that have the potential to produce income or appreciate.

The objective is to gradually change the ratio between obligation-generating spending and freedom-generating spending.

More cattle.

Less hat.

Step 2: Build Income That Doesn’t Depend Entirely on Your Job

This is the lesson I wish I had learned much earlier.

For years, my primary economic engine was my career. I worked, the company paid me and I used that income to support my life.

There’s nothing inherently wrong with that. A strong career can create tremendous financial opportunity.

The problem occurs when your job is your only economic engine.

When you have no financial safety net and no independent income, your options become limited. That can force you to stay with a company you no longer enjoy or continue working for a boss who makes your life miserable simply because your lifestyle requires the paycheck.

Women need to start asking:

How can I make some portion of my income independent of my employer?

Maybe it’s investment income. Maybe it’s real estate. Maybe it’s a business. Maybe it’s something you slowly build over the next ten years while continuing to work.

You don’t need seven income streams by next Tuesday.

This is where people often stop themselves because they immediately say, I don’t have any extra money.

Try changing the question.

Where can I find money to begin investing in my independence?

I’ve met plenty of people who say they have nothing available to invest and then purchase a new car, upgrade their house, buy a boat or take on another significant lifestyle expense.

At some point, there is a decision to make.

Do you want every additional dollar to increase your lifestyle, or do you want some of those dollars to increase your freedom?

The goal is to slowly reduce the percentage of your life that depends upon somebody else depositing your paycheck every two weeks.

Step 3: Stop Competing in a Game You Don’t Actually Want to Win

This may be the hardest part because you have to become comfortable not keeping up with the Joneses.

Someone will always have the bigger house, newer car, children in private school, vacation home, designer handbag or extravagant vacation.

It’s incredibly easy to look at those things and think, Why don’t I have that?

But remember the iceberg.

You’re looking at what exists above the surface.

You have no idea what’s underneath.

Everything someone owns has to be paid for somehow, and every financial decision involves a trade. The thing they may be trading away is freedom.

I was on vacation this past summer and watched a father spend much of the daytime on business calls. This was an expensive resort. His children were water-skiing, boating, playing on the beach and enjoying everything the trip had to offer.

He was physically there, but he wasn’t really on vacation.

I obviously didn’t know his financial circumstances, so I can’t know why he was working. But watching it reminded me of something important: being able to purchase an expensive experience and being free enough to enjoy it are not necessarily the same thing.

I’d rather have a slightly less expensive vacation I can actually participate in than a luxury trip I’m chained to my laptop to support.

Every dollar you don’t use to purchase somebody else’s perception of your success is a dollar you can potentially use to purchase your own freedom.

Financial Independence Doesn’t Mean You Stop Enjoying Your Life

I don’t want you sitting at home eating lentils in the dark while your retirement account grows.

Life is happening now.

Take the vacation. Buy the coffee. Have dinner with your friends. Send your children to camp. Buy things you genuinely love.

Just make logical trades.

I bought a nice espresso machine because I genuinely enjoy a great latte every day. I still go out for coffee, but I don’t do it nearly as often. That machine allows me to enjoy something I value while saving more than $1,000 a year.

That’s money I can invest.

My son can still go to camp. It simply doesn’t need to be the most expensive camp available.

We can still take beautiful vacations. I can choose discounted rates or travel during off-peak periods.

This isn’t deprivation.

It’s intentional consumption.

Spend money on things that genuinely add value to your life. Stop spending money on things you don’t particularly value because you think you’re supposed to have them—or, perhaps even worse, simply because you can afford them.

Slowly Move the Puck

Building wealth doesn’t have to involve some dramatic financial transformation.

You don’t need to sell your house tomorrow, cancel every subscription and announce that nobody in your family is ever eating at a restaurant again.

Slowly move the puck.

When you receive your next raise, don’t automatically increase your lifestyle by the same amount. Put some of that money into a brokerage or retirement account.

Instead of replacing your car every three years, keep it for five.

Instead of purchasing a brand-new model, consider one that’s a year old and invest the difference.

Build a small business on the side.

Consider an income-producing asset that fits your finances and risk tolerance.

Calculate your net worth and start tracking it annually.

Cancel subscriptions you don’t use and redirect that money toward investments you can watch grow instead.

Most importantly, before making your next large purchase, stop asking only:

Can I afford this?

Start asking:

What else could this money buy me?

Because $50,000 doesn’t only buy something that costs $50,000.

It can also purchase an asset with the potential to produce something for you for years.

Once you begin thinking about money this way, it starts to look very different.

The Goal Isn’t More Money. It’s More Life.

We only get one life.

That’s it.

There are no do-overs.

One of the greatest things money can eventually buy isn’t a handbag, a car, a boat or a bigger house.

It’s choice.

The ability to leave the bad boss.

The ability to change careers.

The ability to take some time off.

The ability to build something of your own.

The ability to spend more time with your children.

The ability to say, This doesn’t work for me anymore, without wondering how you’re going to make next month’s mortgage payment.

That’s what financial independence means to me.

I wish I had understood much earlier in my career that earning more money and building more freedom weren’t necessarily the same thing. I can’t go backward and change those years, but I can make different decisions with the years ahead of me.

And so can you.

So the next time you find yourself looking around and wondering why everybody else seems richer than you, remember that you’re looking at their hats.

You have no idea how many cattle they have.

Let them have the hat.

We’re building the herd.