What is the good life to you? Like many, I used to imagine Barbie and Ken with the big home, matching BMWs, vacation home(s), and luxurious yacht. I assumed that Barbie and Ken were the very portrait of success. However, a closer look revealed that my vision was distorted. That mortgage payment is over 50% of Barbie and Ken's gross income, and the BMW is leased. That boat was financed too. Once I realized that Barbie and Ken likely had plenty of credit cards and student loan payments too, I had a profound revelation. Barbie and Ken are broke! They are just a lot more risky and have more toys. They could not write a $20,000 check with their own money because they literally spend all of the wealth they can get their hands on. They have borrowed money to look and feel rich.
David Bach, author of "The Automatic Millionaire," sheds some much needed light on this issue...
There is an unbelievable amount of wealth in America (and other developed countries), yet most people are not wealthy. For example, nearly half of the wealth in America is owned by less than 5 percent of the population. Individually, the other +95% doesn't even come close, and the middle class is a dying breed.
Income vs. Wealth
It is not an income problem either. For example, in America, several millions of households make six figure incomes, yet few realize significant wealth. These households still live from paycheck to paycheck because they cannot out-earn their poor financial choices. Working for 10 to 25 years without having anything tangible to show for it is not wise. Unlike China, Japan, and Europe, savings seems to be a lost discipline in America. Note that according to a recent Business Week article, the national savings rates for Europe, Japan, and China are 20%, 25%, and 50%, respectively. On the other hand, America has a negative savings rate: for every dollar we earn, we spend $1.22. You see it is a lot easier to obtain a high salary than to have a high net worth.
That's because obtaining a high net worth usually requires discipline and other smart wealth-building decisions. Unfortunately, most people do not have much wealth. Recall, wealth is how long you could survive financially without working.
Similarly, true financial independence means you have accumulated enough wealth to survive financially without a job. Your investment income supports your lifestyle.
Reshaping Your Portrait of Wealth
Our celebrity culture emphasizes extraordinary displays of wealth. I will be honest and admit that Oprah's lifestyle seems desirable, even enviable. I heard recently that Jerry Seinfeld's wife just gave her 21 pairs of shoes worth an estimated $18,000. Shoes are not my gift of choice, but that's definitely impressive. This is the picture many of us get when thinking about the wealthy: pure extravagance. Listen to Dr. Fred Price's fictional examples of how most people view success...
As interesting as those extreme examples of wealth are, most of the wealthy lead very typical lives. The no frills life of an average millionaire real estate or stock investor seems boring by comparison. Interestingly, this investor may NEVER realize a huge salary, but because he or she consistently invests, his cash flow is significant. Consider Robert Shemin's illustration...
I am not advocating any one route to wealth because there are numerous ways of achieving it. Regardless of your path, know that one of "the seven common denominators amongst those who successfully build wealth is... (that) they believe that financial independence is more important than displaying high social status" (Millionaire Next Door). The translation is impressing others with their wealth is NOT a major concern. This is food for thought on that next shopping excursion to Neiman Marcus, the new car dealership, or the electronics store.
