By: Roshawn Watson
Oh the glitter! The exotic cars, the homes, the private planes, chauffeurs, the celebrity hot spots, and nightly $300-plus per person dinners, etc. all encompass our vision of wealth. Advertisers will spend a fortune marketing this image of the wealthy to us because this is what will get us to part with our hard earned dollars. After all, money is the most easily renewable resource, right? Surely, we're smart enough to out earn stupidity (or at least our irresponsibility). If this is your perspective or if this lifestyle is your aspiration, then there is a secret that you should know. Occasionally, the people living these high consumption lifestyles make or have so much money that they are living WAY BELOW their means. In other words, given their high level of wealth and cash flow, they're actually frugal by their standards because such luxuries are a small part of their world. However, all too often, these big spenders are playing another game entirely. They look rich but are really financial frauds, and this is their story.
You Can't Have Both
I recall an instance where two of my friends were discussing their VERY fancy cars. Both were high income earners, but I remember thinking these two people are as different as night and day financially. One was conscientious and had been frugal for most of her life. She bought her dream car and could genuinely afford to pay for the car outright. The other friend was broke. He had over $100,000 in credit card debt and a house payment he couldn't afford. Although they both looked prosperous, the broke friend looked and dressed the best with his designer clothes! I guess his philosophy is to fake it until he makes it. However, he never did make it.
Assuming that the median household income in the US is approximately $50,000, most households will bring in approximately $2 million over a working lifetime (not including taxes nor adjusted for inflation). What will you have to show for it? My wife and I sometimes watch a show on HGTV called Property Virgins, about the perils and triumphs of first-time home buyers. Because first-time buyers typically don't have much money, the host/realtor Sandra almost always has to rein in their expectations. She often makes them decide whether to compromise on the size and amenities of the home or their desired location because almost certainly they can't afford both. Similarly, I think you should ask yourselves will you fill your home with fine clothes and the latest gadgets, or will you fill your portfolio with income-producing assets? Sometimes it is important to pose the question in that manner because most people simply can't afford to do both simultaneously.
Some people even go broke trying to look rich. That's right, several people so desperately want to appear prosperous, that they bankrupt themselves playing the part. Teresa Giudice and her husband's recent filing of bankruptcy is just one of the latest examples of this unfortunate pattern. She is on the Bravo hit reality television show The Real Housewives of New Jersey as a bling-flashing, wealthy socialite.
She's also nearly $11 million in debt and has an annual household income of $79,000 (CBS news).
Whoa, that's a far cry from great wealth. Yet on television she is seen living in a $1.7 million mansion, furnishing her living room with gold furniture, and lavishing her daughters with shopping sprees and parties. I'm certainly not making fun of her financial difficulty; I merely bring it up because she is in the public eye portraying and selling the image of wealth, and I am dubious why it took bankruptcy to get them to drop the facade.
Play Some Defense
Even high earning movie stars and producers aren't immune from their financial decisions.
Nicholas Cage's recent financial troubles are also well documented. Consider that this is someone who has generated tens of millions within a calender year. For example, in 2004 he reported his taxable income as $17 million from the movie National Treasure according to Forbes. Most people will never earn $17 million in their entire lifetime, let alone in a single year. In fact, only 3% every make more than $200,000 or more per year. Thus, if you will never become rich playing phenomenal offense (i.e. creating a ridiculously high income as a celebrity, winning the lottery, or inheriting from a wealthy aunt), then the best way for you to achieve wealth is by playing some awesome defense (good money management skills, frugality, and consistent investing). You don't have to take my word for it.
According to the 400 richest Americans (Forbes 400), 75% believe "the best way to build wealth is to become and stay debt-free."
For typical millionaires (not the Phony Rich who generally are not millionaires or are gross under accumulators of wealth), there is little to no pretense. They often go unrecognized because they don't care what others think enough to dress or act the part. They value financial security over displays of status. They would rather focus on their balance sheets, income statements and financial ratios. For example, most millionaires' wealth dwarfs the wealth of their neighbors. Excluding those who live in California, the wealth of most millionaires rank in the top 5 percent of their neighborhoods. This means they can afford to move way up in house but choose not to. Most millionaires live in moderately priced homes (less than $400,000) located in unimpressive neighborhoods. This is one of the ways millionaires avoid becoming house poor, and it is not difficult to avoid emulating high-consumption habits if you don't live anywhere near high spenders. In contrast, two thirds of high earners/high consumers own or occupy homes valued over $1 million. Of course it's okay to live in an expensive home after becoming a millionaire, but most people won't wait that long. Thus, most homes valued at over $1 million or more are not occupied by millionaires.
The Phony Rich are among us. If we are not careful, we will find ourselves emulating them. Never has it been easier for us to pretend to be rich rather than actually become rich. If you choose to assess the wealth of others, the real question is not what conspicuous displays of status they have (i.e. the obligatory BMW) but rather what income-producing assets do they have? In Texas, they call the scenario where someone looks wealthy but doesn't have any tangible wealth: Big Hat, No Cattle. Perhaps, Oprah said it even better. You can have it all but you can't have it all at once! Thus, I pose the question to you. Do you want the big hat (bling and doodads), or do you want the cattle (real wealth)? It is unlikely you can have both simultaneously.
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