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Difference between wealth and income

Created by Sal Khan.

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  • aqualine ultimate style avatar for user Jenny P
    at , why does the grandfather receive a 3% return after taxes on his wealth?
    (7 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      Sal didn't just make up 3% arbitrarily. This is actually a pretty reasonable number for low-risk investments. Here for example is a Vanguard municipal bond fund, which is tax exempt: http://quotes.morningstar.com/fund/VMLTX/f?t=VMLTX - so the after-tax yield is the same as the before-tax yield, and is 2.73% over the last 10 years. Because it's a short-term yield fund your average earnings aren't great, but it's low-risk, so it makes sense as the sort of investment a retiree would have.

      A taxable fund with a similar risk (for instance the VBIRX corporate bond fund) will have a similar after-tax return.
      (18 votes)
  • leafers ultimate style avatar for user go floss
    are there good sources for charts on these things? for example, wealth as a function of income or vice-versa?
    (0 votes)
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  • ohnoes default style avatar for user a.m.ahkee
    Can capital transform into income in the case of the grandfather?
    (2 votes)
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  • spunky sam blue style avatar for user Vishnu Gopalakrishnan
    Ok . Income high means good GDP and the country is moving on well . If most people at least get a good income. Less income means not so good economic growth and they are poor unless they have lot of wealth which they can choose to either spend in consumption or investment both of which will also ensure good economic growth. Right ?
    (1 vote)
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  • blobby green style avatar for user Ron Pang
    Would it not be more impactful if Sal defined income as the increase of wealth over a period of time?
    (1 vote)
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  • leaf green style avatar for user Caitlin Carden
    Why wouldn’t annual income be the best measure of a person’s wealth?
    (1 vote)
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  • leaf orange style avatar for user Samwel Otieno
    Could we refer to wealth as the total capital assets owned less total capital liabilities?
    (1 vote)
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  • aqualine ultimate style avatar for user danielt
    At , how would the rate of adding one "0" at a time eventually make the income larger than the wealth. If you keep multiplying wealth and income by 10, in this case, wouldn't the wealth stay higher no matter how many zeros you add, as long as you add the same to both wealth and income?
    (0 votes)
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    • leafers sapling style avatar for user Peter Collingridge
      Yes, income will always be 3% of wealth (in the example). But the point is, as wealth increases, so does income. So in general, someone with a higher wealth will have a higher income. Sal initially gave an example where this wasn't the case, but then showed if the retiree earned 10x as much, then their income would be higher than yours (in the example). Their wealth would be higher than yours and so would their income, which is a more common scenario.
      (1 vote)
  • orange juice squid orange style avatar for user theyoungjon
    In the situation with the grandfather, what does it mean to get "a return after taxes on his wealth"? Does it mean that this is the money he made after he paid the taxes?
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Video transcript

- [Instructor] Before talking more about inequality, I think it's worth talking about the difference of what, the difference between wealth and income. Wealth and income, because I think they often get confused in conversations about, well, wealth and income and also about inequality. As you can imagine, these two things move together. You tend to associate someone who has more wealth has a higher income, or someone who has a higher income is more likely to have more wealth. But these are not the same things. Wealth, wealth is, you could view it as the capital or the assets that you own. So this is the value, value of capital, capital and assets that you own, capital and assets that are owned, while this is how much is made in a certain period of time, so amount, amount made in a certain, certain period. And they tend to move together but not always. So let's take an example where they don't move together. So let's say that there's a retiree. A retiree might have a lot of wealth because they've had a whole lifetime of income to save. So let's say that your grandparents, or let's just say your grandfather has a wealth, so the total assets, his total assets, let's say he has a million dollars, a million dollars in total assets. But he's not working anymore, he's retired, so his total income, his total income is the return that he gets on that one million dollars. And let's say that he has invested it in reasonably safe things and some bonds and whatever else. And so he's getting a, let's say he's getting a 3% return after taxes on his wealth, so his income is going to be $30,000 per year. Now let's say you, let's say this is you over here, let's say you, maybe you're just out of college, maybe you actually have more debt than you have assets. So maybe your wealth could even be, your wealth if you, if, you know, let's say you have a $20,000-car, but you owe $40,000 for your college loans, you might have negative wealth. You might have a wealth of negative $20,000, but you've, that education was to good use, you were able to get a really good job, and you are now making, let's say you're making $80,000 a year. So this is a situation where the younger person, they actually have more liabilities than they have assets, could even have negative wealth, but has a reasonably high income, while someone who's older and retired could have a lot of wealth but a lower income. Now, as you can imagine, this is a, you know, this is kind of, I've drawn two extremes here between a younger person making a good amount of money, but they have some debt, and an older person who's just living on the returns from their cumulated wealth over their lifetime. Now, as you could imagine, these two things do start to correlate, especially, for example, let's say wealth got really big. Let's say instead of your grandfather saving one million over his lifetime, let's say it was 10 million, Let's say it's 10 million. And he's investing it in the exact same way, so now that 3% of 10 million, he has $300,000 per year to live off of. So obviously, as wealth grows, the income from wealth, the income from that capital will grow. And at some point, that income could be larger than what you might be able to make purely from labor. But the whole point of this video is to at least highlight the difference. Sometimes when people talk about inequality or disparities, they'll talk about accumulating wealth in a segment of the population, while other times they will talk about accumulating, the national income going more and more towards the top 1% or top 10% or the top quartile or whatever. And they often move together, but it's important to realize the difference.