Want to know the secrets of the rich? Here it is.
Spend less than you make.
Yep. That’s it.
But that’s not a message most of us want to hear. It means changing the way we’ve been living. It may mean changing how we shop for groceries, how often we eat out at restaurants, kicking cable TV to the curb, skipping that next shopping trip, packing peanut butter and jelly sandwiches for work, selling our gas guzzling car, or any number of other changes that are really hard to swallow.
But you know what else is hard to swallow? Working for 20, 30 or 40 years only to end up broke and dependent on the government. If we don’t change, that’s exactly the plan we’re choosing.
And here’s a simple truth that most of us struggle with. Wealth is invisible.
Look at this quick example.
Mike has a take home pay of $100,000 a year.
But Mike spends $110,000 a year.
How is it possible that Mike can spend more than he makes? It’s called credit and financing – a.k.a. DEBT. Mike financed his very nice car. Mike lives in a nice house in a nice neighborhood with a mortgage that he feels like he can afford. Mike financed the furniture that fills his house. And Mike uses his credit cards to buy nice clothes and the latest technology gadgets. He even has a wonderfully large TV with an amazing cable TV package. Mike works hard, and often late, so he ends up eating out 4 to 5 times a week, using his credit cards. His last washer and dryer were 7 years old, and he didn’t think his dryer was getting the job done to his satisfaction, so he bought the best new washer and dryer and got a “great deal” by financing it.
Next thing you know, Mike spent $10,000 more than he made this year, and he likely never even realized it because it’s just buried in all those credit card purchases.
Now let’s look at Dana.
Dana has a take home pay of $35,000 a year.
But she only spends $30,000 a year.
She makes a shopping list and eats at home a lot. She has some nice clothes, but only buys new clothes once or twice a year. She drives an older paid-for car. She rents a nice apartment in a lower middle class neighborhood. Her furniture is outdated, but it does the job. Her TV is older. She doesn’t have cable, but watches shows and movies on Netflix. Her cell phone is 4 years old, but works just fine for her. She only owns 6 pairs of shoes that she rotates generously. And she doesn’t even have any credit cards.
At the end of the year Dana has saved $5,000.
Now let’s look into the future. Assuming nothing changes in Mike and Dana’s finances, in 5 years…
- Mike will be $50,000 in debt
- Dana will have $25,000 in savings.
But here’s the ugly truth. If you and I saw Mike and Dana around town – seeing the car they drive, seeing the clothes they wear, perhaps seeing which neighborhood they drove out of – we would automatically assume Mike is doing better financially.
And we would be completely wrong.
All we can see with our eyes are material possessions. We can’t see wealth.
- We can’t see how much they have in their savings account.
- We can’t see how much debt they have.
- We can’t see if their car is paid off.
- We can’t see if they’re carrying a massive debt load on credit cards.
- We can’t see how much they have invested in a 401k or Roth IRA.
Basically, we can’t see anything that really matters financially, and yet most of us would secretly wish to be more like Mike and less like Dana.
This is completely backwards. We have to understand in our consumer-centric culture, an abundance of material possessions is more likely a sign of debt, not wealth.
So if we’re going to get serious about saving money and building wealth, we have to get serious about letting go of material possessions. Not forever, but for a season while we buckle down, get gazelle intense and start taking control of our money using the power of the budget.
We have to start getting comfortable looking and acting different than those around us. We have to list our debts, smallest to largest, and start killing them off like target practice. We have to discover that there are some really great used clothes on the rack at the local thrift shop. We have to shop smarter, and shop less. We have to say no to ourselves on a daily basis, so one day we can say yes to things we’ve always wanted without any guilt.
And, if we’re married, we have to show our spouse that we’re in this together, and start making hard sacrifices for the sake of our shared future.
And we have to do these things because 5 years is going to pass, and 10 years, and 15, and we don’t want to look back and regret that we didn’t get started right now!
Our families, our communities, and even the larger world around us are desperate for us to get our act together.
It’s easier to stop trying to look wealthy when we realize true wealth is invisible.
Have you ever fallen into the trap of thinking your stuff made you rich? (Haven’t we all?) What’s one thing that you bought that you just loved at the time but now you realize was a complete waste of money? Let me know in the comments.