Don’t Be Rich And Broke

As part of his investing endeavors, John travels all across the U.S. and Caribbean, meeting business leaders, government officials and high-income individuals in all sectors of careers and business.  To this day, what still shocks him is the vast segment of people he meets that are rich, but broke (i.e., living paycheck to paycheck).

How is it possible to be both rich and broke?

Ask yourself if you fit in either of the following categories:

Rich: You make a lot of money.

Broke:  You don’t retain much of that money. 


Ideally, you shouldn’t focus on being rich (i.e., on the amount of money you earn); but instead, you should be focused on being wealthy (i.e., not having to worry about money.

Now compare the rich vs. the wealthy:

Rich: You make a lot of money.

Wealthy:  You don’t have to worry about money.  You don’t need your job to sustain your lifestyle.  Instead of being broke with a lot of debt, you have a lot of assets that create and maintain your wealth.  Instead of cash depleting assets, you have cash flowing assets (i.e., assets, investments, companies, etc. that make you money in your sleep).

Notice in the diagram above the difference in the types of assets that the middle class and wealthy own.  The types of assets that the middle class own along with their liabilities and expenses result in a net depletion of cash instead of a net gain.  The types of assets that the wealthy own create cash and do not deplete it.  This results in a net gain of cash instead of net losses like those experienced by the middle class.


You can make a high income, but you need to ask yourself if your money habits mirror those of the middle class or of the wealthy.  If you’re rich (i.e., you’re a high wage earner) but make money decisions like the middle class, then you’re essentially middle class despite your big house and nice cars. 

To be wealthy is to have your money work for you instead of the other way around. While the middle class have assets that ultimately deplete their cash, the wealthy have productive assets. These productive assets (i.e., investments and businesses) create passive income that can be reinvested to grow existing income streams or create additional ones.  Passive income frees the wealthy from the chains of a 9-to-5 job. If they work, it’s because they want to work and not because they have to.

A high income does not constitute wealth. If a rich person’s liabilities and expenses drain their income and the only assets that they own (a home, cars, etc.) are assets that are money pits, they will never be wealthy.  High wage earners who don’t understand this will die broke.  If they don’t understand that, unless they acquire assets that generate passive income, they will always be slaves to their jobs.


The wealthy separate themselves from the “broke rich” by their attitudes towards expenses and liabilities.  While the broke largely ignore the consequences of expenses and bad debt, the wealthy avoid bad liabilities at all cost by not going into debt and they are focused on their expenses because they’re keen on minimizing them. The wealthy minimize bad debt and expenses so that they can allocate more of their income towards good assets – assets that can cash flow. 


What types of assets do the wealthy gravitate towards for generating passive cash flow? 

Private real estate and investments in private companies (i.e., private equity) are far and away the two assets most coveted and allocated by the wealthy.  Income-producing assets like commercial real estate and private equity not only have the potential for generating above-market returns, but these assets also offer a buffer from broader market volatility because they’re not subject to the same market forces as highly liquid traditional assets like stocks.

The wealthy have figured out that to avoid being broke and to cut the cord of a time clock, one needs to turn away from nonproductive assets that deplete wealth and gravitate towards assets that make your money work for you.  They have to acquire assets that make money while they’re sleeping in order to create, grow and maintain wealth. 


Many professionals, like physicians, lawyers and business executives, think that being wealthy is having a high income, but as we’ve discussed, it’s possible to be both rich and broke. 

The lesson from the wealthy is that if you want to avoid being rich and broke, you need to avoid debt and minimize expenses in order to allocate your wages towards cash-flowing assets.  Only in this way will you be able to achieve wealth and financial independence.