When It Comes to Money, You Can't Judge a Book by Its Cover

Five Cent Nickel has an excellent article on the fact that appearances can be deceiving when trying to determine whether or not a person is rich. This same principle is what made the book The Millionaire Next Door so popular -- that you can NOT tell who is rich simply by looking at someone, their clothes, their house, their cars, etc.

For instance, let's say you see two people:

• One is wearing top-of-the-line clothes, has hands full of jewelry, drives a Lexus, and lives in the most exclusive part of town.

• The other is driving a 10-year-old car, dressed casually Dockers and a polo shirt, sports only a wedding band and a watch, and lives in a middle class neighborhood.

Ok, so which of these two is wealthier?

Answer: You can't tell.

Sure, the person that appears to be rich obviously has something going for them -- even if it's only the financial capacity to borrow a ton of money. And the other person could be rich or could not be -- you simply don't know. But in many (most?) cases, the average observer would say the first person is the "rich" one. But the more we find out about personal finances and how people treat their money, the more we know that this is often not the case.

I see these principles at work all around me as follows:

• My kids will see a home and/or car and say, "That person is RICH!" We have to then explain that the person may or may not be rich -- that you can't tell by looking. Perhaps they simply borrowed a ton of money to buy things they couldn't afford.

• We haven't yet informed our kids that our net worth is several times that of the average American and they haven't figured it out for themselves -- because we live a lifestyle way below our means.

• We have friends that make an "average" income (from what I know talking to the husband.) Yet they drive a high-end SUV and live in the most expensive home in their neighborhood. Looking at them, many would say they are "rich." Yet now that they want to move across the country, they're having a hard time because they have to sell their home at a price that's far above market value to afford the move. To the informed observer, the reason for this is because they've been living well above their means.

Over the past few weeks we've seen several examples of people who make a very large income but can't control their spending and, as a result, they are going backwards financially. It continues to shock me but we see the same thing happen over and over and over again -- those that appear to be rich are going bankrupt, hurting for "cash flow", or simply in tough financial shape despite giving appearances that they're beyond wealthy.

Just goes to show that when it comes to money, you certainly can't judge a book by its cover.

Comments

[Ted]

very true! and an old story.

"He lived comfortably on credit. Indeed who is there that walks London streets, but can point out a half-dozen of men (of credit) riding by him splendidly, while he is on foot; courted by fashion, bowed into their carriages by tradesmen, denying themselves nothing, and living on who knows what? ... How did this begin, we say, and where will it end? We see Jack Thriftless prancing in the park ... The end must come someday, but in the meantime Jack thrives as much as ever; people are glad enough to shake him by the hand, ignore the little dark stories that are whispered every now and then against him, and pronounce him a good-natured, jovial, reckless fellow."

from the book Vanity Fair (1847)

[years in school]

I think the main take-away of this (great) story is that it makes a big difference WHEN you start working. If you are in school/residency until you're 35 (like the doc likely was), it's very very hard to be financially stable at 40 - you've still got huge debt from med school loans, and likely have children (with their associated costs). Yes, you may make $250k, but you haven't saved ANYTHING yet, and much of your salary disapears into taxes and loans and daycare/family expenses.

It makes me sad - doctors are needed and valuable, but financially I don't think going into medicine is a wise choice anymore.

By the way, I'm an engineer, and it's a great career for earning wealth - start working at 23 earning $70k (with a master's degree paid for through TAing/research grants), able to sock away $10-$20k/yr through my twenties, max out my 401k, and buy a house. By the time I'm 35 I'll likely have a net worth of $500k, and my med school friends will juuuuuust start gaining traction.

[Personal Finance]

I would almost go as far as to say that a lot of times the opposite is true......those who seem rich are in debt

[chynalemay]

The M'aire next door before my 1st M$ and the M'ind before my 2nd M$ were two of my BEST EVER reads on meoney and wealth, so I'm retired at 47 and none of my neighbors have a clue why/how/what it took to do it! (hard work, risk - I was self employed, delayed gratification w/o "extras and non necessary expenses" like NO cable tv, eating out, coffeee from home, no new fancy cars, etc..) 10-40% of my income ALWAYS socked away annually for 25+ years, work hard, pay myself first, NEVER have consumer debt, now, debt free, and 50~ years to enjoy it! Graduated w/ a BS in '82 w/ no school loans, 2 very old but, paid for cars and a job ('82 recession job market was FAR worse than today), everyone in college should work 1/2 to full-time, instead of "spring breaks and taking out large loans" for out of state schools, can't get scholarships, free aid ? Then: go to community college, or state schools! Employers want to see DRIVE and "CAN DO",I did and hired/fired more than ever post here..not school names on a diploma!

[Mike Hunt]

Years in school- you should be able to do much better than that. I also started working with a Masters degree in Engineering at age 23 at the princely salary of $42k per year, this is in South Bend, IN where the cost of living is low. Now at age 35 I have a NW of about $1.5M, nearly all by savings from salary. Stock market investments didn't do so hot, bought a condo for cash and am living in it and never received any gifts or inheritances. When I started at 23 I had no debt. Of course I rose through the ranks very fast and got some lucky breaks. It can be done.

-Mike