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In Lesson 029 I will be discussing the conflicting paradigm between “looking wealthy” and “getting wealthy”. I will discuss the 3 sins of “looking wealthy” that trap people in the rat race. I will discuss why your focus should be on becoming wealthy and ignoring the desire to “look” wealthy.
Looking Wealthy
Billions of people around the world spend hours every day on their phones looking at Instagram models, celebrities, and other influencers who have more money than they know what to do with. Humans have always had a relative perception of reality (as opposed to an absolute perception). Even if they have a good life, if they spend too much time looking at people who have a great life, they feel unsatisfied.
The rise of social media has exponentially increased this phenomena and the desire to look wealthy. Instead of just trying to “keep up with the jones” people are trying to “keep up with the Kardashians”. It’s very hard to have the same house, car, and wardrobe as a billionaire…
At the end of the day, what everyone really wants in life is to feel:
Respected
Important
Relevant
Powerful
Influential
Loved
A lot of people think that if they look wealthy, then people will give them these things. The irony is that the people who focus on looking wealthy typically get trapped in the rat race and they never rise to their full potential.
Someone who focuses on becoming wealthy will grow a large sphere of influence. As such, this individual will be respected by their peers, loved by their families, and be involved in import and relevant events.
As I discussed in L-22 - TLDR - PRACTICAL INVESTING LESSON, the first step of investing is to adjust your life style such that you are saving money. If you aren’t saving any money then you will not be able to invest any money and if you aren’t investing any money, then your purchasing power will significantly decrease over time.
The 3 Sins of Looking Wealthy
Below I will discuss the 3 major mistakes people make in their life style that prevent them from saving any money.
Buying a house that is unnecessarily big
Buying a flashy car
Buying luxury goods that have no additional utility
Buying An Unnecessarily Large House
A house is typically everyone’s largest expense on their personal income statement. Although a house can be a great investment (especially if you house hack), an unnecessarily large house can drain your savings very quickly.
If you don’t have kids, I highly recommend buying a 2 to 4 bedroom townhome or SFH and house hacking. Not only can this help you save money on rent, it can actually turn your home into a profit center instead of an expense.
If house hacking isn’t for you, you can still be practical with your primary residence. If a $400k home gives you all of the things you need, you don’t need an $800k home just because your co-worker bought one.
This should be your first house
This should not be your first house
Consider the example below that compares the monthly cash flow between a $400k and a $800k house.
Assumptions
20% down payment
2.5% interest rate
30 year mortgage
3.0% property tax rate
Insurance and utilities are proportional to the home’s value
Result
You can see that the monthly payment scales proportionally to the cost of the house (e.g. the monthly payment of a $800k house is 2x that of an $400k).
A lot of people will justify buying a luxury home by saying “it’s an investment” but in reality it is a cash flow killer. Instead of buying an $800k home, you could buy two $400k homes and rent out the second house; that’s an investment.
In the above example, the cash flow difference (that does not go to principal) is $2,183. That is $26,200 per year. If you invested this $26,200 each year at a 10% ROI over the 30 year mortgage, that turns into $4.77 million dollars….
Buying a Flashy Car
Almost everyone understands that a car is not an “asset” and that it is a liability. Cars depreciate quicker than almost any other large purchase (unless of course there is a global pandemic and the world runs out of semi-conductors and the auto-manufacturers are not able to build new cars and the used car market explodes).
This should be your first car
Your first car should be 100% practical. This is just the transportation you need to make it through high school, college, and maybe the first few years of your career.
As such, your first car should be a cheap, used car. The only criteria you need are:
Does it drive well?
Is is safe?
Does the AC and heating work?
If yes to all three, then it will do.
This should be your first “nice car”
I had a 2007 trailblazer for 11 years and put about 130,000 miles on it. In 2020 I decided to buy my first “nice car”. I bought a Volkswagen Tiguan for $23k. It’s a cheap, mid-size SUV that is super practical, decently fuel efficient, and doesn’t break the bank.
I test drove a bunch of other cars (just for fun) and I actually prefer how the Tiguan drives over the 2020 Porsche Cayenne ($70k to $95k depending on upgrades).
I think my Tiguan is the perfect example of a nice new car.
This should not be your first car
Example
This example calculates the future value difference between buying a $23k Tiguan and a $90k Porsche Cayan.
Most cars can be purchased with:
72 month note (6 years of payments)
0% APR (zero interest payments)
The yearly delta in payments is $11,167. If this money is invested at 10% ROI, it grows to $934k in 30 years.
Buying Luxury Goods
I visited Dubai for two weeks in 2015. It’s a great destination to visit, but I would never want to live there. Status is deeply ingrained into the culture of the city. The city definitely punches you in the face with luxury and money (7-star hotels, gold-plated toilet seats, and streets filled with Lamborghinis, Ferraris, and Bugattis. But what really shocked me was learning how expensive the license plates were.
Dubai has a license plate naming convention that has one letter followed by 1-5 numbers. Examples:
A 12345
F 5432
D 444
G 25
J 6
The lower the number, the rarer the license plate and the more expensive the plate trades in their open market system.
I actually saw this license plate… it probably costs 10x-100x what the car does.
Some of these license plates sell for close to $10 million dollars.
Dubai A9 license plate sells for 38 million Dirham ($10.35 million dollars)
What’s the purpose? The license plate has no additional utility over any other license plate. It’s 100% a status flex to say, “look how much money I have.” If you’re a billionaire in Dubai, that’s great, but for the rest of us, this status oriented mindset will prevent you from ever becoming truly wealthy.
Most of us aren’t in the market for multi-million dollar license plates, but I bet a lot of you know someone who has purchased something similar to below:
Louis Vuitton purse ($1,000 - $5,000)
Chanel hand bag ($5,000 - $30,000)
Rolex watch ($10,000 - $200,000)
Gucci high heels ($3,000 - $5,000)
All of these items have a knock-off brand that is equally as practical, looks just as good, and is literally 10x-100x times cheaper. The only difference is “the brand.” One might argue the craftmanship is better for the luxury brand. Maybe this is true, but the luxury item that is 10x-100x more expensive is not going to last 10x-100x as long.
I can support buying reasonably expensive items if they bring a lot of utility and are used over and over (this is the price per use argument). However, most of these luxury goods are used only on special occasions. As such, you are paying hundred or thousands of dollars to only use them a few times.
Not only is buying luxury items a waste of money, it actually could make your friends resent you. Think about it this way, how do you feel when you see a celebrity or Instagram influencer spending millions of dollars that you might never have?…
…It probably makes you feel bad about yourself.
If you are constantly flexing your wealth (real or fake), it’s probably going to make your friends feel bad about themselves and over-time they will build a negative feeling towards you.
Getting Wealthy
The ultimate “flex” in life is having free-time. That is the goal at the end of the day…
To have the flexibility to do what you want, when you want, with whom you want.
There are three reasons why most people fail to become wealthy:
It takes a lot of hard work, dedication, energy, and consistency to make a good income.
Spending money is very easy and people fall victim to “the 3 sins of looking wealthy.”
They fail to invest money they do actually save.
Out of the three items above, I think bullet points 2 and 3 are much more important than bullet point number 1. People over estimate the importance of a good income and underestimate the importance of living humbly, saving, and investing.
If you don’t believe me, I suggest you read the story about Ronald Read who died with a net worth of $8 million dollars. Spoiler alert, he was a janitor.
Summary
There is a big difference between looking wealthy and getting wealthy. A lot of people try to look wealthy because it makes them feel like they are respected, important, relevant, powerful, and influential. In reality, when someone tries to look wealthy, it can cause the opposite reaction from their peers, friends, or family.
There are three keys to becoming wealthy:
Earn
Save
Invest
Most people focus on earning and completely disregard saving and investing. There are “3 sins of looking wealthy” that prevent many people from saving money:
Buying a house that is unnecessarily big
Buying a flashy care
Buying luxury goods that have no additional utility
If you can avoid these 3 sins and invest your money you will become wealthy overtime. Even if you are a janitor.
Reference Material & Social Media
In Lesson 030 I cover how to navigate and utilize the Google Sheet I have built for all WCD lessons. This Google Sheet contains a worksheet for each WCD lesson. Each sheet has all of the Excel calculations, tables, graphs, and charts that I have posted in the respective WCD lesson. Additionally, the Google Sheet has a master “Index” worksheet that has links to all of the content associated with each lesson.
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