Would you rather be rich or wealthy?
If you’re like most people, you’re probably thinking, “What’s the difference?”
Turns out it has less to do with your assets and more to do with your mind-set, claims New York Times columnist Paul Sullivan, author of “The Thin Green Line: Money Secrets of the Super Wealthy.”
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Those who are wealthy, Sullivan asserts in his new book, have achieved financial security because they’re in control of their money.
The rich, by contrast, may have more zeros at the end of their paychecks—but they have far more precarious financial situations.
Curious to learn more about this wealthy-rich divide, we caught up with Sullivan to better understand how each camp's money behaviors truly differ—and what strategies we can possibly adopt, even if we aren’t members of the millionaire’s club.
LearnVest: So what is the ‘thin green line’?
Paul Sullivan: It’s an organizing principle that came to me midway through writing the book: It's a line that divides wealthy people from rich people, poor people and just about everyone else.
You can think of it like a classic stock chart—it starts low, goes high, is a little jagged, and you can see the dips here and there. I thought that would be a decent concept to help people visualize the financial decisions they were going to make throughout life.
Can you elaborate on the difference between the ‘wealthy’ and the ‘rich’?
Here’s an example that may help illustrate it. You could be young and just starting out in the workforce, not making a ton of money. Maybe you have student loan debt, and you don’t have a house or much savings, but you’re making the correct [financial] decisions relative to your age and income.
That in and of itself would put you on the right side—the wealthy side—of the thin green line.
Another example might be a retired schoolteacher. She spent 30 or 40 years working, saved $100,000, paid off her house, and has a pension. She likes to go out with her friends, takes one or two trips a year, and volunteers. She's also on the right side of the thin green line.
On the other hand, you might have a hedge fund manager who has a giant house, multiple cars and a second home—but he’s overleveraged. If something goes wrong, he could end up losing everything.
And things don’t even have to go wrong—they could simply not go right enough. Maybe his bonus is not what he expected, so all the decisions he’s made [assuming he’d get the bonus] could cost him. Even though he has a very high salary, he’s on the wrong side of the thin green line.
Another way to think of the divide: If you’re wealthy, you’re able to make the decisions in life. If you’re not, life is going to make those decisions for you.
A hedge fund manager bad with money? Really?
I had a doctor who was probably 50 pounds overweight. You’d think that because he was a doctor, he would know better. But he might also eat too much, and not exercise enough.
It’s the same with hedge fund managers. You may think, “He works with money all day long; he should have some understanding of this.” I’d say that assumption is incorrect.
It’s one thing to trade stocks in the hope of making a profit, and it’s another to make the right financial decisions for yourself.
And think: If the people who do this all day long get things wrong, the rest of us are also going to make mistakes.
"Certainly the more you earn, the more options you have. But there’s not a correlation that says those who have more money make better decisions."
Many of the wealthy in your book make a lot of money. Can you really be wealthy making $40,000?
The short answer is yes—but your lifestyle has to match your income.
If you want to fly from New York to L.A. three times a month and stay at a nice hotel, and buy new clothes every season, chances are you’re going to run up a lot of debt. And you’ll find yourself five years down the road unable to make your own decisions—you’re going to have the decisions made for you.
I try to drive this home in the book: Money is a means of exchange. Certainly the more you earn, the more options you have. But there’s not a correlation that says those who have more money make better decisions.
What are some common mistakes that would impede someone from becoming wealthy?
I would say that mistakes one through three are racking up too much debt. That’s how bad it is—it’s worth three mistakes. And I’m not talking about taking out a mortgage to buy your first home. I mean those couple dinners out a week, or buying more shoes and sweaters than you need.
The next mistake is not funding your 401(k). Take full advantage of what your company matches—and max it out. You won’t miss money that’s taken straight from your paycheck. Not being able to take advantage of saving when you’re young—and letting it compound over time—is a big mistake.
Here's an interesting stat in your book: The wealthy spend 30% less on eating out, and save 30% more for retirement. Is this the secret to being wealthy?
I never want to come across as saying, “Don’t eat out, and put all your money into retirement savings.” Because you’ll do fine for three or four months, but then you’ll say, “This is no fun. I’m 25 years old—I’m not going to retire for another 40 or 50 years.”
But there are certain small changes that I believe can have a big impact down the road, like choosing a set amount to put toward retirement each month—and making that sacrosanct.
And think beyond retirement. There are many other things to save for too. At some point you’ll want a house. Or your car will break down.
If you can, first commit to saving whatever you can afford each month, then go ahead and eat out. This idea is more liberating because you’re following a plan—you’re not on a diet.
And if you feel like you’re following a plan, that’s not a deprivation mind-set, but an empowering mind-set.
"My money script meant that I didn’t want to spend—even once my wife and I had cash saved up. She’d say, 'You’ve had these shirts since college!' With this money script, you probably won’t go broke."
Does our upbringing impact whether or not we’ll be wealthy?
It will give us different money scripts for life. Say your family was about to lose the house. In example one, your grandparents came in and saved the house. In example two, your parents found a way to scrape together enough and save the house. In example three, they lost the house.
The precipitating event is the same, but in each example you get a different outcome—and you’re going to take that lesson with you throughout life. It’s going to affect your relationship with money.
I grew up in modest circumstances; we were probably poorer than I realized. I had to make my own money because no one was going to pay my rent. And I wasn’t going to live on the couch, because the couch wasn’t an appealing place.
So my money script meant that I didn’t want to spend—even once my wife and I had cash saved up and a nice house. I still found it really difficult, to the point where my wife would make fun of me. She’d say, “You’ve had these shirts since college! The collars are frayed!” With this money script, you probably won’t go broke in life.
But if your script is that net worth and self-worth are the same, that’s very difficult. Then your script tells you, "If only I had a bit more money, everything would be better." That might lead to choices that put you on the wrong side of the green line.
Since writing this book, have you changed anything about the way you live?
We sold our condo in Florida, because I learned that maintaining it was a waste of money. That was crushing.
Do we have more insurance now? We do. Do we have disability insurance now? We do. Do we fund our daughter’s 529 plan before anything else? Yeah, we do.
The temptation [to spend] never goes away. But the reality is that we have to know what we shouldn’t splurge on if we want to live on the right side of the green line.