It’s common to think earning a lot of money means ‘I’m going to be rich’. This is not true – you can’t retire on your income or eat your home, writes Toby Pascoe.

Being rich is about the assets you own, and your income is simply what you earn from your job. This means financial advisors often sit in front of couples who earn a lot of money …but who are poor.

On the flip side, there are also couples who earn a low income, but are rich and own a lot of assets. But how does this happen? Let’s compare two case studies:

HIGH INCOME, BUT POOR

Lawyer Jim and accountant Jane earn a combined income of $350k. When I met them to discuss their retirement, they told me they own their own home and are paying off their $900,000 mortgage.

But … that’s it. They have no other assets. In their mind, their home is the retirement fund.

This is not a good plan. Because you can’t eat your house, and you can’t use it to live. The only way for Jim and Jane to use this in their retirement is to sell, and then buy a substantially cheaper property to live in.

And while this can be an attractive idea in theory, from my experience working with investors, this often doesn’t work out in practice.

Jim and Jane couldn’t get their heads around a looming retirement when in their minds’ they thought: “How could we not be sorted with retirement … if I earn so much money? We’re going to be fine.”

I never heard from them again.

The way Jim and Jane think about their financial future was vastly different from the way our next couple do.

LOW INCOME, BUT RICH

Teachers Len and Lisa earn $110k as a combined household salary. About $55k each.

This is at the lower end of what a couple would need to invest. And clearly substantially lower than our first couple.

But they’re good with money and only have about $320,000 left on their home mortgage. And when I first met them – like Jim and Jane – they only had their own home. No other assets.

From the get go, Len and Lisa were energised to invest.

But these guys decided to purchase an investment property … they ended up purchasing a $550k two-bedroom townhouse in Christchurch and are looking to buy more when they can.

And after using our My Wealth Plan software, this couple calculated that they just need to invest in one more property to build a $100,000 a year passive income.

WHO IS GOING TO BE RICHER?

In 15 years’ time, who’s going to be richer? The high-income earners clearing over $300,000 or the teachers on $55,000 a year.

It’s the teachers, every time.

Because they are the ones who will have assets (outside their home) that they can use to fund their lifestyle once they stop working.

For the high-income earners, when they stop working… the money stops coming in.

But for the low-income earners, they’ll have two investment properties that they can either sell and then live off the proceeds. Or they can live off the rental income.

Many people reading this article should also listen. Because, if you buy strategically, and make a good investment decision – you don’t need to be earning six figures to be rich.

If you invest, you can be better off than someone who earns significantly more but doesn’t do anything with that income (other than spend it and pay down the mortgage).