Spend Like You Want to Grow Rich

The following is excerpted with permission of the publisher John Wiley & Sons (Asia) Pte. Ltd. from Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam. Copyright (c) 2011 by John Wiley & Sons (Asia) Pte. Ltd.

I wasn’t rich as a 30-year-old. Yet if I wanted to, I could have leased a Porsche, borrowed loads of money for an expensive, fl ashy home, and taken five-star holidays around the world. I would have looked rich, but instead, I would have been living on an umbilical cord of bank loans and credit cards. Things aren’t always what they appear to be.

In 2004, I was tutoring an American boy in Singapore. His mom dropped him off at my house every Saturday. She drove the latest Jaguar, which in Singapore would have cost well over $250,000 (cars in Singapore are very expensive). They lived in a huge house, and she wore an elegant Rolex watch. I thought they were rich.

After a series of tutoring sessions the woman gave me a check. Smiling, she gushed about her family’s latest overseas holiday, and expressed how happy she was that I was helping her son. The check she wrote was for $150. Climbing on my bicycle after she left, I pedaled down the street and deposited the check in the bank.

But here’s the thing: The check bounced— she didn’t have enough money in her account. This could, of course, happen to anyone. With this family, however, it happened with as much regularity as a Kathmandu power outage. Dreading the phone calls where she would implore me to wait a week before cashing the latest check finally took its toll, and I eventually told her that I wouldn’t be able to tutor her son anymore.

Was this supposed to be happening? After all, this woman had to be rich. She drove a Jaguar. She lived in a massive house. She wore a Rolex. Her husband was an investment banker who should have been doing the backstroke in the pools of money he made. It dawned on me that she might not have been rich at all. Just because someone collects a large paycheck and lives like Persian royalty doesn’t necessarily mean he or she is rich.

The Hippocratic Rule of Wealth

If we’re interested in building wealth, perhaps we should all make a pledge to ourselves much like a doctor’s Hippocratic oath: above all, DO NO HARM. We’re living in an era of instant gratification. If we want to communicate with someone half a world away, we can do that immediately with a text message or a phone call. If we want to purchase something and have it delivered to our door, it’s possible to do that with a mobile phone and a credit-card number— even if we don’t have the money to pay for it.

Just like that seemingly wealthy American family in Singapore, it’s very easy to harm our fi nancial future by blowing money we don’t even have. The story of living beyond one‘s means can be heard around the world. To stay out of harm’s way financially, we need to build assets, not debts. One of the surest ways to build wealth over a lifetime is to spend far less than you make and intelligently invest the difference. But too many people hurt their financial health by failing to differentiate between their “wants” and their “needs.”

Many of us know people who landed great jobs right out of college and started down a path of hyperconsumption. It usually began innocently. Perhaps, with their handy credit cards they bought a new dining room table, but then their plates and cutlery didn‘t match so they had to upgrade.

Then there’s the couch, which now doesn‘t jive with the fi ne dining room table. Thank God for Visa— time for a sofa upgrade.

It doesn’t take long, however, before our friends notice the carpet doesn’t match the new couch, so they scour advertisements for a deal on a Persian beauty. Next, they’re dreaming about a new entertainment system, then a home renovation, followed by the well-deserved trip to Hawaii.

Rather than living the American Dream, they’re stuck in a mythological Greek nightmare. Zeus punished Sisyphus by forcing him to continually roll a boulder up a mountain, only to have it maddeningly roll back every time it neared the summit. Many consumers face the same relentless treadmill with their consumption habits. When they get close to paying off their debts, they reward themselves by adding weight to their Sisyphean stone, which knocks them back to the base of their own daunting mountain.

Buying something after saving for it (instead of buying it with a credit card) is so 1950s— at least, that’s how many consumers see it. As a result, the twenty-first century has brought mountains of personal debt that often gets pushed under the rug. Before we learn to invest to build wealth, we have to learn how to save. If we want to grow rich on a middle-class salary, we can’t be average. We have to sidestep the consumption habits to which so many others have fallen victim.

According to The Wall Street Journal, the average U.S. household in 2010 was strapped with $7,490 in credit-card debt. A Huffington Post business article reported in 2011 that 23 percent of Americans owed more money on their mortgages than their homes were actually worth. In Nevada, 66 percent of homeowners could sell their houses and still not have enough money to pay off their mortgages.

Now here’s where things get interesting. You might assume it’s mostly low-salaried workers who overextend themselves. But consider this: According to U.S. author and wealth researcher, Thomas Stanley, who has been surveying America’s affluent since 1973, most U.S. homes valued at a million dollars or more (as of 2009) were not owned by millionaires. Instead, the majority of million-dollar homes were owned by non-millionaires with large mortgages and very expensive tastes. In sharp contrast, 90 percent of those who met the defined criterion to be a millionaire— having a net worth of more than $1 million— lived in homes valued at less than a mil lion dollars.

If there were such a thing as a financial Hippocratic oath, many people would be committing malpractice on themselves. It’s fine to spend extravagantly if you’re truly wealthy. But regardless of how high people’s salaries are, if they can’t live well without their job, then they aren’t truly rich.

Comments

[RichUncle EL]

This is true and most people have fallen to credit cards at one point in their lives. People tend to live frivolously without any concern. It's sad to see how many people can live so much in the moment and not care for the future.

[Jonathan]

I recently had a discussion with a friend (age 25) who likes fast cars. All his dreams involve driving fast cars. he makes pretty good money, but between an expensive condo and the fast cars hobby, he's barely getting by.

I asked him how much it would cost on a monthly basis to do what he wants with cars, and he came up with $1,000 a month. I then suggested that if he were able to save up $100,000 and invest it in rental homes, he could earn that $1,000 a month from his investments (Note to readers - these numbers work from my personal experience, but the actual numbers are irrelevant to the point so don't get caught up on them!).

He estimated that if he tried he could probably save that up in 4 years. At this point I pointed out to him that if he could save $2k a month for 4 years and invest it to earn $1,000 a month, he'd then have $1,000 a month for his cars AND he'd still have that $2,000 a month that he's learned how to save, which he could continue to invest or save for retirement, and could potentially start to earn enough non-W-2 income that he could live off of it entirely.

He said not a chance, he wants to live it up. He also made an interesting comment - "The way I see it, I have an agreement with employment - I work, I get paid. I work so that I can do all the other stuff I want to do, and I'll keep working forever so I can always do that stuff."

I felt he was very shortsighted on this, but didn't push the issue...We'll see how his attitude may change over the next decade.

[Jonathan]

I should point out that at my suggestion that he could even live off his investments, he didn't believe that could be done without living like a pauper both before and after that "crossover" point. He seemed to think all of my suggestions revolved around living like a monk now and in the future. I suppose until he figures out that doesn't have to be the case, his attitude will not change.

[MonkeyMonk]

LOL ... I first read the headline for this article as "(Spend Like You Want) to Grow Rich" which didn't sound like very good advice at all. What if you want to spend like a madman?

[Old Limey]

I could certainly spend a whole lot more money than I do but I know it wouldn't make me a bit happier. I am old enough now to understand what it takes to be truly happy and you don't have to be filthy rich to achieve it.

My needs are:
1) To be in a permanent and loving relationship - absolutely #1.
2) To live in a nice home, in a nice neighborhood, and have enough amenities and comforts to sustain a happy, safe, and contented life.
3) To not be worried about one's ability to pay off any debts that you might have.
4) To have access to good healthcare.
5) To have a good relationship with my family.
6) In younger days, I also needed a stimulating job that I enjoyed and that also paid enough to sustain a lifestyle that I was content with.

Even now, my wife and I lead a far better life than either of our parents, yet they always seemed to be very happy with a whole lot less, even during the bombing and severe rationing during WWII in England.

[Apex]

@Jonathan,

If you try this enough times you will soon learn that you are talking to the wind. He will never learn this lesson as long as he can continue doing what he is doing. Only a crisis will cause him to even consider that his current thinking could be ill advised. Even a crisis may not work if he can find a way out of it that doesn't involve a change in thinking and life style.

Here is the problem with your advice for almost all people. It required a SACRIFICE NOW. It required a POSTPONEMENT of gratification until LATER. In return it offered a PROMISE of FUTURE benefit.

Of course all financial prudence requires that. You will find out that if people have been able to arrange their lives to avoid doing this and get what they want that they have a force field around them which makes all such advice that they should do something different entirely incapable of reaching any reasoning centers in their brain. This is FACT!

And frankly, if you think about it, why should they listen to you. They have been getting what they want NOW. They have every reason to believe that continuing to do what they are now doing will always get them what they want NOW. Why should they stop getting what they want NOW under the promise that doing so will get them what they want LATER. This is a bad trade off. They already get everything they want NOW. And your PROMISE that they could get it and MORE with less financial burden later is not appealing to them because first they aren't easily convinced that is true (they never see anyone who evidences this other than people they believe were born rich or make huge amounts of money), and secondly even if it was, they don't care, they get what they want now and its good enough.

Even if people are in a tight spot and can't quite make ends meet, that does not qualify as a crisis and the force field is still in full effect. You have to take out their force field power generators before they will listen to a word you say. And that requires a real crisis under which NOW has already ceased to give them anything they want. Then they realize their thinking is broken. Until such time, their thinking is working and yours sound thinking is just a bunch of babbling after being intercepted by their force field.

[Jonathan]

Apex,

Thanks very much for the response - you articulated the problem very well.

What I got out of that (the last paragraph particularly) is that I need to cause some sort of crisis in this person's life. Any suggestions? :)

[Apex]

@Jonathan,

LOL. Yes ... children. :)

[Jonathan]

Haha, I wouldn't wish him as a father on any child at this stage in his life! Nor his wife as a mother!

[Thrifty Writer]

The stuff about how the new table leads to new cutlery, leads to a new couch, etc., is pretty much the Diderot effect http://en.wikipedia.org/wiki/Diderot_Effect. One of the advantages to living with my parents for a while, after college, is that I didn't have to worry or care about that stuff. When I did move out and moved in with a roommate, I made sure to move in with one who had plenty of stuff she didn't mind sharing, since I didn't want to have to move things like dishware or furniture or buy it. It's worked great for the past 3 years, but every now and then, I feel like I should be a "grown-up" and own some nice dishware or glasses, and then I remind myself of the Diderot Effect..