There is a difference between making money and building wealth, both of which are essential components to your well-being. Basically, making money or earning income is the amount of money you make over a certain period, like your salary or commission. It allows you to generate cash flow to meet your daily needs and pursue your shorter-term goals.

The first and one of the most important steps of personal financial management is to know your income. It may seem rather basic, but you would be surprised to learn that many people do not actually know what they make each month, after taxes and any other deductions. It’s important to calculate all your income, which can come from a variety of sources, like salary, profits, wages, pensions, dividends, and more.

Three of the main types of income are earned, passive and portfolio. Earned income includes wages, salary, tips and commissions. Passive, or unearned, income comes from things like rental properties, royalties and limited partnerships. Portfolio, or investment, income includes interest, dividends and capital gains on investments. Knowing your income is important because it determines how much you can spend, save, and invest, all elements that contribute greatly to your wealth.

Wealth, as described in the Oxford dictionary, is “an abundance of valuable possessions or money”. Building wealth is done over the long term and allows you to sustain your needs and meet your medium to longer-term goals. Financial wealth is most commonly measured by net worth, which is the total of your assets - like savings, investments, real estate, and more - minus any liabilities, like loans or mortgages, for example. It basically measures all the assets of worth you own at a given point in time. Both income and wealth enable you to live the life you want to live. Theoretically, if your net income is positive over time, you should become increasingly wealthy over time. This assumes, however, that you don’t spend everything you make and that you allocate a portion of your income to savings and investments.

Although it’s crucial to save enough to meet your goals and be available for emergencies, saving alone does not enable most people to build sufficient wealth. Unfortunately, in today’s interest rate environment, it is very difficult to earn enough interest on savings to offset the cost of inflation. In general, wealth is generated by investing.

Indeed, if you want enough wealth to achieve your goals and dreams, you must invest. One of the world’s most famous investors, Warren Buffett, perhaps explained it best when he said: “If you don’t find a way to make money while you sleep, you will have to work until you die”. With this quote, Mr. Buffett is encouraging people to make money work for them instead of spending their entire life earning money. The money that you make while you sleep is called passive income, and this is money that you put to work for you through investing.

There are several basic steps to build wealth as follows:
• Earn enough money to meet your basic needs, with some leftover for saving
• Set goals and develop a plan to achieve them
• Develop a budget so you don’t spend more than you make
• Save money, have an emergency fund, and automate saving to make it easy and convenient
• Invest so that your money can grow and stay ahead of inflation
• Keep a long-term perspective and ensure you diversify your investments
• Protect your hard-earned wealth by ensuring you have insurance
• Manage debt and build your credit
• Continuously educate yourself

At the end of the day, the proven way to build wealth is through regular saving and investing. The earlier you start, the better, so that you can benefit from the power of compounding, which is essentially when you add interest on interest, thus helping your wealth grow over time. While earning an income is obviously important, if you focus on growing your net worth and wealth, you can build a foundation for financial stability and independence. As always, take control of your
destiny by prioritizing your financial education and staying informed on the constantly changing financial landscape.

An Investor Education and Awareness Initiative of Aditya Birla Sun Life Mutual Fund.
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