Rich vs. Wealthy vs. Financially Free: What’s the Difference?

We've been told that getting rich, wealthy, and financially free is all the same thing. In fact, I've realized that being rich is the first step to financial freedom. After building $2 billion companies, after investing in 100 plus deals, after being a banker at Goldman Sachs and Credit Suisse, helping billionaires invest their money, I've realized that there are three stages to wealth. So in this video, I'm going to break down for you the actual three stages to wealth. What is getting rich? What is getting wealthy? And what is becoming financially free? The first thing we have to do is to actually define what getting rich means. Rich means high income. Well, high income starts, is the driver for everything that you do in your journey to becoming wealthy. That is why investing in yourself and creating the skills that you need to create the income is the first step to generating any form of wealth. I want to give you the craziest story. When I first got into entrepreneurship 14 years ago, I was a banker at Goldman Sachs, and I had an opportunity with my partner to invest in a real estate company. And I knew that investing in that company meant for one, two, three plus years, I probably, I'm not going to get any payout, any salary. I had to work for free, but my wife was actually working at that time as a consultant at Deloitte Consulting. We were expecting our first child, and so we made a decision. We made a decision to go from two incomes to one income, and we said we were going to live our life on one income until I was more fortunate enough to get my first child. I was financially stable, but the crazy part is we spent the first few years on that one income, on my wife's salary. And then for the last 14 years, we have frozen our lifestyle to be at that one income. Our net worth is 50 times more than what it was that day. But today, we have still frozen our lifestyle on that income. Why? Because rich is high income, and high income is entirely based on the surplus. Because if you make $100,000 and you spend. $20,000, then you have $80,000 worth of surplus that you can do something with, that you can invest in a better life, that you can create new skills with. But if you're making $800,000 but are spending $800,000, it doesn't matter because you have high income. You have no extra surplus. Our job is to figure out not just to get high income, but to get the coverage, to get the surplus. Because once you have the surplus is when you can actually start investing into creating a better life. The question is not, "I'm figuring out what hot stock to invest in or to invest in the S&P 500." This is the idea, not the S&P 500, but the S&ME 500. What skills can you actually create and get right now so that you can have a significantly better income? Because the better income, the high income, is what actually starts you to get rich. That is the first stage of the wealth ladder. The second is high net worth. The high net worth component is wealthy is becoming, is having high net worth. Well, what is high net worth? High net worth is when your assets are greater than your liabilities. And this is where you actually have income to go invest in these assets. But people always ask me, Well, Sharron, what is an asset? An asset is owning something that pays you to own it. So, let's talk about an asset. Is real estate an asset? Well, does it pay you to own it? Yes. But is your big screen TV an asset? No. So, we have to figure out how to get obsessed with assets because wealthy, is just high net worth. So, the question is, is there a formula for wealth? Yes, there is a formula for wealth. And that is when you have some capital, when you get a good return, and you have time. I'll say it again. Capital times return times time is what generates wealth. Because if you just had a million dollars today, are you wealthy? No, you have a million dollars in cash. That's good. But if you have a million dollars today, and you're getting 10% return a year, and you let it compound for 10 years, now you're getting wealthy. Now you're creating, you're creating the asset associated with that. That is why this is extremely important. Our job is to figure out how to generate more assets. And the question becomes, well, where do I go generate these assets? There are two methods that are proven in the Western world to generate the maximum number of assets and give you the highest net worth. And that is the golden stairways. The golden stairways are the two methods that give you the best possible shot at creating amazing high net worth for yourself. One of the golden stairways is investing in businesses, and the other is investing in real estate. Why? Because both of these vehicles generate equity. And equity has an asymmetric upside. Asymmetric essentially means that it starts off as a baseline one-to-one principle, but as it grows, you have an unreasonable upside that happens with them. Take a business. Let's say you start a business today, and it grows from $100,000 a year to a million dollars a year to $5 million a year. But now someone wants to buy that business, and they're willing to pay three times that income. So now you can get $15 million for your business, which you could not have generated in any single year. So you have equity that actually grows, which is one of the golden stairways. The second is real estate. Real estate is one of the best paths for wealth creation for two important reasons. Number one, you can actually get leverage with real estate, meaning you can borrow against a real estate to invest in. Very few assets allow you to, borrow against it to actually invest in it. For example, if you wanted to go buy Apple stock, you couldn't borrow money to go invest in Apple stock. That doesn't work. You couldn't get that deal. But in real estate, if you wanted to buy a piece of real estate for a million dollars, you could put $200,000 down, get a $800,000 loan, and actually generate value from that. Our ability to understand the golden stairways will help us create a massive amount of wealth because the Forbes 400 list is filled with business and real estate. So, if you're a real estate tycoons, did you know that the U.S. tax code is engineered for real estate investors? So, you actually get a significant tax reduction because you're an investor in real estate. In fact, the top 1% of people in the world own 40% of all the equities in the world, all the stocks in the world. How crazy it is that the top 1% own 40% of all the companies in the world. That is because of the golden stairways. You can either invest in businesses or invest in real estate. And the best part is, today's world has given us a chance to be able to invest in businesses and real estate without having a lot of money. You don't have to wait till you have tens of millions of dollars to be able to invest in real estate or businesses. My son, Neil, he's 14 years old. And he's heard this conversation of me talking about the golden stairways of investing in businesses and real estate often when we're in the car, when I'm taking him to soccer practice, when he can hear the conference calls that I'm having. And he asked me the question, he's like, Dad, when in the world would I be able to invest in businesses and real estate when I don't have that much liquidity or that much capital? But now he's able to do that because there are funds, ETFs, that allow you to get exposure to businesses and real estate. For example, my son, Neil, invests in VOO, which is the Vanguard ETF of the S&P 500 index. Instead of buying one business, he's invested in a piece of the 500 biggest companies in the United States. But even in real estate, he invested in a fund called VNQ, which just owns, all of the North American real estate opportunities. So even before he can go buy a business or do private equity or start his own business, he now owns a piece of businesses where someone else is creating the equity for him. He now owns a piece of real estate from all of North American real estate. At 14 years old, my son is trying to figure out how to actually increase his net worth because wealthy is high net worth. We know now from a definition perspective that rich is high income. Wealthy is high net worth. But what is financial freedom? I define financial freedom as high independence. Now, what does that mean? To me, independence is coverage. Meaning, can the income that automatically gets generated cover my expenses? I define financial freedom as where your passive income is greater than your monthly expenses. Imagine your monthly expenses were $10,000 a month and you were able to generate passive income of $12,000 a month. That means you have $12,000 coming in without. without you having to put in any effort and that still covers your monthly expenses. Meaning you can wake up every morning and say, what would I like to do today? That is the cool part because your income covers your expenses. You have full coverage. If you don't have that, that's okay because then your active income, meaning the way you go to work, the job that you do covers your expenses. Our job is to move from active income covering monthly expenses to passive income covering monthly expenses. And the question is, how do you do that? I always say, I always thought that passive income was a scam. I thought that the only way you can get it was if you were extremely wealthy or you had to take some kind of course or trade in forex for an exchange. But when I was a banker at Goldman Sachs and I was helping the billionaires of the world invest, I saw that they were interested in the most basic things, the most boring investments. They just wanted investments that would provide them cash flow. They invested in stocks and bonds that provided them cash flow. They invested in municipal bonds and corporate bonds. They invested in real estate and REITs and apartment complexes with the entire goal of generating the income to cover their expenses. They didn't want to take big swings on their money. They already had it. But they had found a way to generate passive income. That's when I realized maybe I was defining passive income wrong because we know what active income is. Active income is when you trade time for money. By the way, most of us, any time for money. We have a job. We go in, we work, and we get paid for that. LeBron James has a job. He goes in, he works, and he gets paid for that. Having a job is not a good thing or a bad thing. It's just that you have to trade time for money. You have to go put in the effort to get a certain result. But passive income, passive income is when you're truly free. And so if active income is trading time for money, passive income is doing what? It's trading money or effort for money. I define passive income as pre-funded income. What does that mean? You can pre-fund your income by investing in something today so that it pays you later, which is effort, or in capital. Because nobody is going to wake up in the morning and send me a check for $10,000 a month. I know that. That just sounds absurd. So I have to generate passive income for myself in some way. So there are two ways to generate passive income, since it'd be pre-funded income. The first way is you generate passive income for yourself in some way. And the second way is you generate passive income with effort. Well, what is effort? What if I generated affiliate income today, where I marketed to an affiliate program, and they started paying me based on this affiliate commission? So I put in one-time effort, and I started getting cash flow based on that. Or I worked with a startup company, and I told the startup company that I would not take any salary. But once they were profitable, they would start paying me cash for life. Or I created some music on Spotify, and I started getting paid a royalty. Everything where I put in some effort today, and then I get paid for life. One of my friends runs one of the largest network marketing programs in the real estate business. And because of that, he spends all his time trying to recruit real estate agents to join a company called Real. And based on him doing that, he's able to generate revenue share. And he spent three years doing that, but now he makes $100,000 a month in revenue share that he has to maintain the network for, but it's all passive income. He does not have to trade his time for money, but he funded that with effort. You can also fund that with capital, just like my clients at Goldman Sachs. They're billionaires, but they funded it with capital. They actually bought a piece of real estate. They actually invested in a stock. They built a dividend portfolio. And when they did that, their capital still stays in place, but it starts to generate cash flow for them. Now, they're able to wake up in the morning and say, does this cash flow actually beat my monthly expenses? I've realized that passive income is not a scam. We just have never been taught what to do with it. Once I realized what my clients were doing, shifted my mindset. I realized it was just pre-funded income. And if I understood the concept of passive income, I could be financially free as well. And I remember the day when my passive income was greater than my monthly expenses. I remember that day so well because I was not able to believe what happened to me. I remember that all these years that I worked for from the pre-funded income, I was starting to get cashflow that covered my monthly expenses. That was the day I looked at my wife, I gave her a big hug and I said, we have made it. Not because we hit a number, not because we had a hundred plus million dollar net worth, not because we somehow are going to make it on the Forbes 400 list. All of those are great goals. But for me, I realized that when my passive income was greater than my monthly expenses, I was truly financially free. Our job is to figure out that wealth has a ladder. The first stage of wealth is ensuring that you become rich. That is high income. The second stage of wealth is that you want to make sure you have a net worth where your assets are greater than your liabilities, where you actually have assets and you can obsess with those assets. But the third and most obsessive final stage of creating wealth is where you are financially independent and you have good coverage, meaning your passive income is greater than your monthly expenses. I honestly thought that passive income was a scam, but when I spent all of these years learning about it, it has demystified it for myself. I'm so glad that I've been able to make it. I have done this myself. I'm living proof that poor kid from India can come to the United States, have nothing, and with the help of people be able to do all of this. And I will tell you, as I look back on this financial journey, I think about this one quote. The thing that I wrote in my journal a few years ago. In my 20s, I thought it was about the destination. In my 30s, I realized that it was about the journey. But in my 40s, I finally know that it's about the company, the people that you're with, the people that lift you up, the people that you work hard with, the people that you're in the trenches with, the people that you celebrate with. Because having all of this wealth, having all of this financial freedom means nothing if you can't celebrate it with the people that you love.