I pride myself on being a highly optimistic individual. In fact, I purposefully approach each and every day with the mindset that I am going to focus on the positive change that I can make.
That said, however, there’s a lot that someone can learn by observing the behavior and actions of others that lead to a less than desirable outcome.
In fact, if you can look at the inputs that are being applied by someone else and see the outcomes that they’re getting you can make the decision if that’s a formula worth applying in your own life. There’s nothing more applicable to this than personal finance.
I suspect that it wouldn’t be much of a surprise to learn that most people are engaged in wealth robbing activities. Sadly, too many of us know how to make an income but not wealth.
However, the wonderful thing about life is that it leaves some pretty obvious clues if you look for them.
What you think are ‘absolutes’ may just not be true
I find this approach particularly interesting in the way we Americans live our financial lives. Chances are if you’re open to questioning some things that you might have taken as ‘absolutes’ up to this point then you might just come to some interesting and very different conclusions than what you originally had come to in the past.
More specifically, let’s focus in on the couple that ‘has it all’. A recent example that was provided to me still resonates in my mind as I think of all the things that are being done by this young couple that will prohibit them from building wealth.
For starters, they both own very expensive, high-end, newer luxury cars. They also purchased one of the most expensive houses in that chic new neighborhood outfitted with all the trendy furniture.
In addition, they buy all of the latest gadgetry and don’t deny themselves of any other pleasures of American life like the full cable TV package, the unlimited data cell phone plan and all the monthly subscription services.
Success Veneer
What we see on the outside, this ‘success veneer’ as I like to call it, does not remotely reassemble any of the structural components of this life just below the surface. In fact, here’s what’s really going on…this couple, which looks like they have it all, have all the ‘trappings’ of a successful life but none of the ‘structural’ aspects of a successful financial life.
They both each have significant college debt, high five figure debt for both of them, and a massive outsized mortgage on their house having put just 5 percent down when they purchased it.
The couple that ‘has it all…DOESN’T have it all
But you know what they don’t have? They don’t have anything put in place to build wealth! This same couple is using every last dollar from their two very high income producing jobs to service their consumerism based lifestyle. As a result, they’re doing next to nothing in regards to saving and investing for the future.
Think about it? There are very, very few situations where even for high income earners (because of school debt) where a couple living this level of lifestyle has enough of a gap between their income and expenses to make the type of investments needed in order to build wealth.
Even extreme high income earners, like doctors…especially doctors…tend to live on ‘financial vapor’ as they work to make a mountain of monthly payments.
Those with the most toys have less net worth
I’m willing to bet that a large majority, if not a super majority, of these people that are living the ‘success veneer’ lifestyle have less net worth than a similar couple making a lot less on the income side of the equation but that are investing for their future.
How do I know this? Well, for me it was a lesson that I thankfully learned quite early in my career.
I was handling the financing for a gentleman who was buying a business and for which my employer was providing a portion of the loan needed to close the deal.
On the surface he was a rockstar of life! He drove a Mercedes Benz, dressed impeccably, had gone to an Ivy League school and even owned a share of a partnership that owned a large commercial building in downtown New York City. The veneer of success doesn’t shine much brighter than that!
Living on financial vapor
However, when you looked at his personal financial statement what was quite telling was that this individual was technically insolvent. Although he made $500,000 of income a year he was servicing debt and a lifestyle that cost in excess of $500,000 a year. Much of it, debt against personal depreciating items.
It might be true that after 20 years when all the debt is paid off and the assets he controls appreciates he would be wealthy…or not…the reality was that in that moment he was technically broke.
What seemed crazy to me is that this wasn’t the only time that I saw that in the time that I held that position. In fact, I saw it quite frequently in the construction and development business.
High income earners are not necessarily high net worth individuals
This same situation routinely plays out in the world of professional sports where some of the highest income earning individuals in the United States have severe financial problems within just years of them leaving the sports world.
More specifically, Sports Illustrated estimated that 78% of National Football League players within 2 years of leaving the league are financially stressed or bankrupt and 60% of National Basketball Association players are broke within five years of leaving the sport.
So if people making millions of dollars a year in income can become broke this quickly you can certainly see how easy it can be for the rest of us. The biggest reason for this is the same reason our young couple is living on vapors and not able to build wealth; substantially high fixed expenses coupled with the challenge to have to maintain a high income and no gap between the two.
It only takes a few hiccups in the economy to affect someone’s income and they’re in trouble.
Think of it this way, if your income were to go down for any reason do your monthly payments go down proportionately? Of course not!
Those costs are fixed and the bank, credit card company, whomever, they expect to be paid in full each and every month.
Wealth robbing advice
As wealth builders, we know how to build wealth. However, we also need to observe the temptations of what we can call the ‘wealth robbers’ and call them out when we see them.
That said, here are some practices that are so common in American life, some which we might even take for granted, but that are robbing us from building wealth:
1. “Always go to an elite college or university, your career will grow into it”:
I’m not even convinced that this was great advice a generation ago in my day but it’s outright terrible financial advice today. It makes absolutely no sense to go to a college and pay $250,000 to become a teacher. I’m sorry but as a teacher you’re never going to ‘grow into’ your expensive education and there’s simply no way to get a reasonable Return On Investment (ROI).
A better calculation is to not incur more debt than what would otherwise equal one year of salary. For example, if you are looking to become a teacher and your salary is going to be $45,000 a year then you should not be incurring more than $45,000 in loans.
I know that this is shocking to most people but the only payback of saying that you went to Harvard to be a kindergarten teacher is the initial “Wow” you might get but it doesn’t pay the bills.
2. “Buy an expensive car because they have the best resale value”:
Does it make any sense to pay $700 a month for a car with the hopes that in 7 years after we’re done paying for it that it ‘might’ have some remaining value to someone else? No…it doesn’t! What makes the most sense is to buy the absolutely most reliable car for the least amount of money and invest the difference.
As wealth builders we want to pay cash for a $5,000 car and invest that $700 a month that we would have paid for a car for the next 7 years. As such, that $700 a month invested for 7 years with a return of 7% amasses more than $75,000.
3. “Buy the biggest house that you can’t afford now but that you will be able to in the next 10 years”:
So let me get this straight. Stretch yourself financially and buy a single family house that eventually you’ll be able to afford? It sounds absolutely crazy when you pose it this way but that’s what most people do. So what’s wrong with that? The obvious is that it would make so much more sense if you bought housing that was safe and sound and were able to invest the difference from what you save on a mortgage and taxes.
For example, if you were to save $1,000 on a mortgage and taxes each month and invested that monthly in the S&P 500 with a 7% return that would yield you over $500,000 in 20 years.
So with this knowledge would you rather pay an additional $500,000 with the ‘hopes’ that your house would appreciate in excess of this amount (not including taxes, maintenance, higher heating/cooling costs, etc.) or would you rather earn an additional half million in your retirement account?
4. “You’ll never learn enough about money so hire a financial advisor”:
Some of the financial advice that you’ll certainly hear at a block party in the neighborhood of that big house you can’t afford. Here’s the thing though, a bonafide study done by Standard & Poors “found that after 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index”.
So why do you need to hire ta financial manager and pay him/her 2% annually for assets under management (AUM) when you could just simply ‘buy the market’ (S&P 500) yourself which would keep you from not only under performing the market but save you 2%.
A couple of years ago BusinessInsider.com did an analysis and found that “while 2% may not sound like much, it adds up to a lot in the long run. If you have a $10,000 balance today and plan to add $5,000 per year to your 401(k) over the next 30 years, a 2% fee will cost you an estimated $153,218 over time”.
So let me ask you one last question…why would you hire someone to advise you financially that is going to cost you over $150,000 and over a majority of the time, under perform the market?
5. “The only way you can make enough money to retire is for you to become a capable investor”:
It certainly wouldn’t hurt if you became a capable and educated investor but here’s the incredible reality…you don’t even need to know HOW to invest if you don’t want to and you can STILL make enough money to retire.
Here’s the unbelievable math; if you started investing $500 each month for 30 years and yielded 7% annually you would amass over $590,000 in retirement savings.
This is possible simply by learning how to save and taking those dollars saved and investing them into an S&P 500 Index fund.
It doesn’t require you to buy the right stock at the right time or follow some wild trading scheme.
It only requires you to save $500 a month (in the example given, saving more gets you there faster) and invest in what is basically a representation of the American stock market.
Conclusion
Wealth building is best achieved when someone is able to start as soon as possible and isn’t caught up in the consumerism life that the American lifestyle has come to be all about. The other part of wealth building is about just simply owning the market, not trying to beat it or time it, just to own it.
Wealth building is also best achieved by following the very simple blueprint that we layout on this blog and resisting bad advice from otherwise well intentioned people. In addition, there is no ‘Success Veneer’ in true wealth building.
