Most people think of the income spectrum as going from rich to poor. They also think of people who have mansions, exotic cars, and expensive clothes as rich. People who rent small apartments, drive old cars, and wear no-name clothes are poor. People who have nice homes, new common cars, and wear lesser brands are middle-class.
Really, though, there is a difference between being rich and displaying affluence, and between being poor and being modest in displays of wealth. To be wealthy is to have storage of wealth, where showing affluence is to be using wealth. To use an analogy, to be wealthy is like having a fully charged cell phone – you have the capability to do all sorts of things and you also have some security since you have the ability to use your cell phone to help you out of a jam. To show affluence is like using your cell phone for all sorts of games and apps, all of which may impress those around you, but which are draining your batteries. If your batteries are always empty since you are always on your phone, you may not be able to access maps or call a family member should you get lost in a strange part of town. Really, the more you display your wealth, the poorer you are becoming.
As Thomas Stanley and William Danko discuss in their book, The Millionaire Next Door, many people who you see with new cars and big houses aren’t necessarily wealthy. They may just be spending every dime they get, then borrowing more, in order to appear to be affluent. Likewise, the guy with the old car in the modest house may have a couple million dollars in the bank because he chooses to invest his income to grow wealth rather than spend his income to appear wealthy. Just as with the fully charged cell phone, having wealth adds security to your life. It also provides freedom because you have that security, and gives you the ability to help others when they need it. You feel more comfortable letting someone else use your phone when it’s fully charged than when your battery is almost dead, don’t you?
Three great books on how to build wealth with a modest income
Robert Kiyosaki approaches the same theme from a different angle in his book Rich Dad, Poor Dad. He shows that people who become and stay wealthy have cash flow first to things like investments and assets, and only then do they allow some of the cash generated by those assets to go to things like cars and clothes. Making money with work and then spending it keeps you poor, even if you appear affluent. If you buy assets and let income generated by those assets pay for the things you buy, you can have wealth and show affluence.
Burke Hedges shows how investing regularly with income from your work can lead to great wealth and security in the book, The Parable of the Pipeline. This book talks about two brothers who earn a living carrying water. One brother tries to get ahead by working harder, which the other spends his free time building a pipeline. Eventually, the first brother gets too old to carry water and suffers. The second brother builds his pipeline, after which he is able to turn a valve and deliver all the water he wants. Anyone wanting to learn how to handle their money in a way to become wealthy and financially secure should read these three books.
Our decisions are what keep us poor and at the verge of a financial calamity, or help us use our income to become wealthy and secure. What kind of decisions do you make? Here are some examples of decisions that make/keep us poor:
- Add monthly liabilities, like subscriptions, cable, and expanded phone plans.
- Buy new cars, which depreciate rapidly.
- Buy things on payments, which consume our free cash, making it difficult to save.
- Eat out a lot, paying four times what it costs to cook at home.
- Buy a big home, which requires a lot of maintenance and money to furnish and decorate.
- Put things on credit cards and not pay them off each month, resulting in huge interest payments.
- Buy a home on a long loan with little money down, resulting in a lot of interest plus mortgage insurance payments.
- Regularly buying overpriced things like specialty coffees.
Here now are some decisions that help us become wealthy:
- Make a monthly budget, which allows us to direct money to important things and identify and eliminate waste.
- Buy used cars, which depreciate less and that we can buy for cash, eliminating interest payments and helping us keep more of what we earn.
- Buying things as we want to use them, rather than paying for things every month or every year that we don’t always use.
- Directing money to assets, like stocks and mutual funds, which generate income for us.
- Planning for things like retirement and college, putting money away for these things early, and using mutual funds to grow our savings and pick up some of the costs.
- Learning to cook good meals at home, which cost far less than meals out or even pre-made meals, and can be a lot healthier for us.
- Buy only the home you need, which reduces money tied up in the house, leaving more to invest, and also reduces the amount of money spent on things like yard and home maintenance.
- Take a lunch to work most days, which allows us to save a lot each week, plus can gives us time to learn new skills or do extra tasks for our careers.
- Buy a home with a 15-year mortgage or less, which drastically cuts the amount we pay in interest and gets rid of the mortgage early, leaving free cash to use to invest.
Just like anything, we end up where we are and stay there usually as a result of decisions we make. Just as having one extra doughnut will not make us fat and one walk around the block will not make us thin, one financial decision will not normally make a big difference either way. Regularly making decisions to become/stay poor will make/keep us poor. Regularly making decisions to become/stay rich will make/keep us wealthy. What kind of decisions do you make?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.