A walk amongst the wealthy…
A small change in our normal, daily routine can sometimes lead to a big discovery.
On an unusually pleasant summer day, MrsFiner and I were taking our usual evening walk. Feeling a bit adventurous, we went farther than we usually do. As we strolled through the new neighborhood, a magnificent house caught our eye.
The house had an impeccable lawn and two luxury cars parked in the driveway. As we marveled and walked past the beautiful house, we could not help but talk about it…
MrsFiner: Wow! That family is wealthy.
Me: Yes, indeed.
After walking a few more steps, I started wondering what we really mean by ‘wealthy’.
Me: What is wealth?
MrsFiner: What do you mean?
Me: I mean, how do we know when someone is wealthy?
MrsFiner: It is simple – they have a lot of money.
Me: Right. So basically; Wealth = Money.
That seemed like a good definition of wealth. Wealthy people have a lot of money.
Spending vs. Wealth
Of the two luxury cars in that house, one was a shiny new BMW 5 series sedan. A glance at the BMW website told us that it was the ultimate driving machine and that it costs around $60,000.
We had now long passed the house, but we were still talking about it…
Me: Wow, they paid $60,000 for the BMW!
MrsFiner: So they must be wealthy.
Me: Well, we don’t know if they are wealthy. Wealth = Money, and we don’t know their bank balance. So we don’t know how much money they have.
MrsFiner: Yes, but they have a new BMW.
Me: All that the BMW tells us is that they spent money to buy it. It does not tell us how much remaining money they have.
If anything, what the BMW tells us is that their wealth has now been reduced by $60,000!
Saying that someone is wealthy because they spend a lot is like saying someone is a good poet because they have fine handwriting. One has nothing to do with the other.
Wealth is what you accumulate, not what you spend.
The Millionaire Next Door
Appearance of wealth vs. Being wealthy
It was starting to get unusually cold for a summer evening, and we decided to turn back home. We were looking forward to seeing the house again on our way back.
MrsFiner: You know what, we don’t even know if they paid for the BMW…
Me: Yes, few people pay cash while buying a car; most lease or take a loan.
MrsFiner: So, we really don’t know if they are wealthy or not.
Me: No, we don’t.
MrsFiner: For all we know, they may be wealthy – they may have a lot of money left, even after buying the car.
Me: Yes. Or maybe they spend all their income on buying things – which means they may not have any wealth at all. Or even worse – maybe they borrow money to buy expensive stuff (living in debt), which means they have negative wealth!
It is easy to buy a lot of expensive stuff. You can get a loan or use a credit card. But that only provides an appearance of being wealthy.
Wealth is income that is saved, not spent. If Wealth = Money, then the only way to become wealthy is to not spend the money!
A large part of an iceberg is never seen (about 90% of the iceberg is below water). Similarly, it is difficult to see who is wealthy. All we can see is the money that is spent – not the money that is saved.
On the other hand…
Many people have a lot of money but still prefer to live frugally. The best example is Warren Buffet, one of the richest persons in the world. His net worth is over $100 billion.
But instead of a multi-million dollar mansion, he lives in a house that he bought in 1958 for $31,500. Buffett does not drive a luxury car or dine at expensive restaurants. He even uses coupons to save money.
Once on a trip with Bill Gates (another multi-billionaire), Buffett paid for their fast-food lunch using coupons!
Related Article: Lifestyle Inflation and How to avoid it
What we learned from our walk
It is natural to think that if someone drives a fancy car, wears high-end clothes, goes on expensive vacations, etc., they must be wealthy.
But after our walk we realized that spending does not equal wealth – in fact, it is the opposite of wealth.
Now we don’t waste our time comparing ourselves to others and getting stuck in the trap of lifestyle inflation. Instead, we focus on building wealth by the only means possible – saving a lot and investing wisely.
Some people even measure there “wealth” for lack of a better term in terms of their ability to borrow.
🙂
I wish this was a joke, but you are right – I have seen this too.