Most, if not all, of building wealth comes down to having the right wealth blueprint in which to do it and executing on that blueprint. Actually, let me add a bit of dramatic flair. It’s about having the right wealth building blueprint and doggedly and relentlessly executing upon that blueprint!
The process of building wealth is simple
The sad truth about achieving financial freedom, financial independence or whatever we want to call it is that it truly is simple. I think that’s the case for most things in life. The problem is that due to the fact that we haven’t achieved it yet and the longer that it takes, we think that it is impossible and give up the pursuit. Is this not the EXACT case with weight loss?
Do we truly not know the process for losing weight? I’m willing to bet that most, if not all of us, truly know how to lose weight. We’ve just not done it and as a result, we think that it is this elusive goal.
As a result of us now thinking that it is somehow elusive, we in turn fortify the thoughts that it may be in fact be impossible to attain. This negative thinking further solidifies the ‘I can’t’ mindset that we’ve constructed and we’ve now made it very difficult for us to embed positive thoughts, actions and habits around building wealth.
The Financial Mentor, Todd Tressider, who I share a lot of thoughts in common with about wealth building writes about his own rules for wealth building which I find very insightful https://financialmentor.com/true-wealth/ten-commandments/13166
What are the three rules of building wealth over the long term?
The rules for building wealth are as follows:
Rule 1: Wealth Builders do NOT pay for ‘newness’
One of the simple foundational elements of wealth building is the practice of not paying for ‘new’. How is this profound or difficult?
It isn’t either but as it turns out this principle seems to be exceedingly difficult for most Americans to practice.
Never pay for ‘newness’
At its basic core, the principle is as follows; individuals who are pursuing a wealth building blueprint NEVER pay for new. They pay for utility.
Let me explain. Wealth builders view an automobile simply as a ‘tool’ for them to use in executing their wealth building goals. That vehicle either gets them to and from their job or it is used in the creation of income through the use of it in their business.
If given a choice, the latter would the better option! As a result, a wealth builder is looking for the highest level of value from this tool at the lowest cost. They are looking only for the utility in this object. Nothing more, nothing less.
Buy an item when it has lost its ‘newness’
Within this context a used vehicle of high dependability at the lowest cost is the desired outcome. Period. For the most part, the individual is looking to buy the object at that point in time where the ‘newness’ has worn off and doesn’t demand a premium in the marketplace but where it still has plenty of utility left.
What’s truly interesting to me in this particular example using vehicles as the subject matter is that it is somewhat easy to identify when an item such as a vehicle ‘bottoms out’ in price where the level of utility intersects with the utility price that is being asked for that item.
For example, even if you were someone who has to own a luxury vehicle there is to a large extent a price level to purchase that vehicle at whereby the ‘loss’ in value is slowed down significantly going forward. This might correlate to a higher price vehicle such as a Mercedes Benz reaching its decelerated ‘utility pricing value’ after 5 years and 35,000 miles.
To a much higher degree, the ‘newness’ premium has been paid for by the original owner and although the item will continue to drop in price over time, it will probably drop at a much, much lower increment.
Wealth builders never pay for depreciation
In other words, wealth builders simply never pay for depreciation of an item’s value. It is extremely difficult to build wealth when you buy a vehicle for $96,000 that doesn’t help create income for you and in 5 years is worth just $56,000. (this is an ACTUAL vehicle in my area being advertised as I write this article. A 2016 Mercedes Benz S550 with 34,000 miles, which brand new cost $96,000, is now being advertised for $56,000.)
Can we do even better if we don’t want to pay even that much premium for ‘newness’. I’m willing to bet ‘YES’. In fact, right in my area is a 2013 Mercedes Benz S550 with LESS mileage, 24,000 miles, for $45,000.
Huh…so we could get the same model luxury car just 3 years older with 10,000 LESS miles for $11,000 less dollars.
I’m not suggesting that this is a good strategy, in fact I’m NOT a proponent of owning a luxury vehicle at all. I prefer that wealth builders buy something SO much more utilitarian and less luxurious…call it a Camry, Accord or Subaru.
My point is that if you don’t want to pay for newness there is still probably an acceptable option to you in the marketplace to get utility, even out of a luxury vehicle.
I wrote the following post to describe how expensive buying a new vehicle truly is https://thefinancialstoic.com/?p=123
Rule 2: Wealth Builders don’t pay for convenience
Let’s be truthful with ourselves, convenience comes with a premium price to it. For example, buy the SAME house essentially on the ski mountain as one off the ski mountain and you’re going to pay a massive premium for the location of convenience if it’s on mountain.
Same goes if you’re buying a cottage by a body of water. Same or LESS house closer to the water will come with an inflated price tag. Wealth builders DON’T pay for convenience they pay for value and utility.
Where can you get into the game that you can afford
Unlike a lot of financial gurus out there saying to forego every pleasure in life so as to amass as much money as you can as early as you can, I abide by a much more rational and balanced approach. As an example, if you want to experience life in a mountain resort community and the joys of living a recreational lifestyle could you perhaps do it at a discount? Most non-wealth builders don’t believe it’s possible and immediately jump into purchasing real estate that they really can’t afford.
Wealth builders look at the experience and place a value on that at a level where they can afford to get into the game. My wife and I have owned a cabin in a mountain resort community for nearly 20 years and we bought it for 300% LESS than all of our peers who bought similar places at the time.
How could this be possible? Simple. They paid a steep premium for convenience of location. However, even though they have convenience over arguably what is for less than 15 minutes each ski day than what we do (it takes us 15 minutes longer to get to the facilities than it does them) they pay for this convenience EVERY single day in a larger mortgage, interest, taxes and HOA fees for starters.
Just 15 minutes of convenience for less than 40 days a year costs them HUNDREDS of THOUSANDS of dollars in additional costs. (by the way, our property was paid off years ago while our friends are still grinding out the mortgage payments).
Experiencing the same experience…for less
Here’s what I ALWAYS find interesting when I talk about this aspect of wealth building. Do those people who pay a significant premium for convenience enjoy a better ski experience than we do?
Maybe for that initial 15 minutes but not after that. Are they skiing on ‘premium’ ski slopes as a result of paying more than we do? Nope, we see them skiing on the same slopes that we do.
So what’s the difference in experience? Simple. It basically comes down to the fact that they were willing to forego putting more dollars in wealth building pursuits over the 20 years that they would be paying significantly more for a mortgage to pay for the convenience of 15 minutes each ski day.
Rule 3: Wealth Builders don’t pay Opportunity Cost premiums
Wealth building is such an interesting mathematical equation and Rule 3 here is a compounding equation of sorts. In its simplest form Rule 3 is the combination of Rule 1 and Rule 2.
More specifically, wealth builders do not pay higher prices for either cost of newness (Rule 1) or cost of convenience (Rule 2) because in BOTH scenarios it denies wealth builders the ability to put the additional money that was needed to pay for these into bona fide wealth building vehicles.
Paying for premiums kills wealth
More specifically, the opposite of wealth building is wealth killing and the more money you have to siphon off to pay for premiums that don’t generate income for you the more you’re killing your prospects of building wealth. The example I like to use for this is quite obvious. Back to the vehicle example.
If we use the example we used herein and were to buy that ‘sweet’ 2013 Mercedes, we’d have to pay roughly $811 each and every month for 60 months at 3.11%. However, if we didn’t pay for newness, convenience or status we could buy a 2016 Toyota Camry with 34,000 miles for $21,000 (give or take). This would cost us $378 a month for 60 months at 3.11%.
Looking at the difference between the cost of the Mercedes and the Camry, we could have an additional $433 a month to invest each month if we bought the Camry.
How much wealthier would we be if we didn’t buy a premium product
Over the course of 5 years, had we purchased the Camry instead we could have invested that difference and made an additional $30,813 (at 6% compounded annually for 5 years).
However, what would happen in the scenario where we got ‘accustomed’ to having paid that higher monthly amount for the Mercedes and simply continued to pay $433 additionally in a car payment each and every month for the next 20 years? That comes out to a little over $198,000!
Let me reframe this. For the ‘privilege’ of owning a used luxury car for the next 20 years at a level whereby the monthly payment is $433 more each month than another car we could have bought, we have ‘cost’ ourselves the ability to have made almost $200,000 in that same time frame! ($433 a month x 20 years @ 6% annual return). WOW! That’s one expensive used car!
Summary
The point here is embedded in the rule. Wealth Builders don’t pay higher Opportunity Costs. They pay for utility, forego the premium for that item and take the money saved from NOT buying that higher priced item and invest outright avoiding having to pay any unnecessary Opportunity Costs.
Wealth building is no mystery. In fact, it is about as straight forward as possible. Wealth builders don’t pay for newness, convenience or Opportunity Costs.
I’ve always enjoyed the advice provided by the Financial Mentor. He takes a no-nonsense, pull no punches approach to helping people build wealth. One of his sayings is that “wealth results from doing what others won’t so you can have what others never will”. What most people will never have is options which is what building wealth truly provides.
