look rich or be rich?

December 24, 2017

Would you rather look rich or be rich?

 

There are very few people that can do both, so most of us must choose one or the other. The answer should be obvious, and most of us would answer it the same way. We'd much rather BE rich. After all having wealth would provide more benefits and satisfaction than merely appearing to have wealth. But there's a major disconnect between how people answer this question and what they actually do with their money. For example;

 

- The average family spends 37% of their income on housing

 

- The average sale price of a new car in 2017 was $33,560

 

- The average household income was only $73,298

 

It doesn't take a degree in Finance to understand that the above numbers don't tell a good story. Why would any household that earns $73,298 pay $33,560 for a car?!

 

Financial Ignorance

 

I believe that people try to appear wealthy even at the expense of actually being wealthy. But I also believe that many of them are too financially ignorant to know better. They may be very intelligent, but that doesn't mean they have financial knowledge. Most people equate a raise, a bonus or another windfall with a reason to increase their lifestyle (bigger house, nicer car, etc..). They believe the reason to go to work is to buy more stuff, and have never been introduced to the 8th Great Wonder and other basic wealth building concepts. While it's partly their fault, it's also a consequence of an over-consumption based society and a lack of financial education.

 

Desperation

 

Lots of people desperately want to appear to be something they're not. They want to appear to have everything and end up getting in way over their heads. These people usually end up with mortgages they can't afford, big auto loans and credit card debt. They constantly feel like they're swimming upstream, it

affects their health and relationships, and they complain that everything is so expensive. And they're right, because everything IS expensive when you have to pay interest on it.

 

Lack of Awareness

 

The third group in the look rich crowd doesn't understand how they fit financially into the world around them. The classic example here is the recent college graduate. Having never earned money before and landing a 'real job' for the first time, the college grad thinks their new $30,000 salary makes them a baller and spends on everything from expensive apartments to the latest tech gadgets. It doesn't take them long to learn that everything is more expensive than they thought and $30,000 is not a lot of money.


 

The BE RICH crowd

 

The BE RICH crowd is much smaller than the LOOK RICH crowd, but the BE RICH crowd is much more informed. This group knows that hours of work are traded for income, and the more of that income we use to build wealth, the more our money will begin to provide for us. But  we can't spend too much of our income on building wealth because we don't want to spend our lives living in a cheap apartment, with a car that's about to breakdown and a five year-old cellphone. Building wealth is not and should not be about denying ourselves things that make us happy. The best solution is to balance financial decisions based on both personal priorities and financial impacts.

 

 

Being Rich AND Happy

 

So how do we balance buying what we need and want while still building wealth.  The first step is to decide what's important to you and what isn't. Does having a short commute make you happy? If so, it might make sense to pay more for housing closer to work. Is your child's education the most important thing to you? You may want to spend money on private school. Do Friday night dinners out with family or friends make your whole week better? You may need to allocate more money to entertainment.  

 

 

The next step is to understand the financial implications of each of the above scenarios. A more expensive house will be a financial burden, but it will likely increase in value too. Friday night dinners don't have a financial payback (just a happiness payback), and that's ok, but it tells us we need to cut back somewhere else.

 

Now that we know where we want to spend, we have to find where to cut back in order to free up the funds to build wealth. For a lot of people, cars are a good place to start. Most of us can and should drive our cars longer, and we should buy cars that we can afford with cash. While that may sound impossible, I explain how anyone can buy all of their cars with cash here. For people that work from home, they may be able to relocate to find cheaper housing and invest the difference. Your personal situation will dictate where cutting back makes the most sense. 

 

No matter what you choose, the idea is to find the right balance FOR YOU and ensure that you continue to invest while doing what makes you happy. 

 

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