A Rich Life
My kids at the moment seem obsessed with cars. Which is strange given that we have never purchased a new car. I drive a second-hand Kia and my husband drives a beaten-up old Toyota. Cars aren’t important to us. But they seem to be to our kids! ‘Spot the Tesla’ is the game of choice on the drive to school in the morning. And one morning last week we spent the entire drive classifying cars as ‘affordable’ and ‘luxury’, with them naming as many luxury cars as they could (that’s much more fun than naming all the affordable cars).
Of course I used this as an opportunity to explain that the presence of an expensive car does not mean someone is wealthy. Maybe the car has a car loan, so the bank actually owns the car. Maybe the car was purchased on a credit card. We also talked about whether an expensive car would make us any happier (we concluded not).
It made me think about Morgan Housel’s powerful quote – ‘wealth is what you don’t see’. He has a whole chapter in his book with that title.
“Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.”
Morgan shares the story of the singer Rihanna. She nearly went bankrupt after overspending and sued her financial advisor. The advisor responded; ‘Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?’ It’s a funny quote, but I think sometimes we all need that reminder.
Real wealth builds because there is income that is not spent. It is, by definition, hidden. And it most often belongs to those people that you don’t notice. Real wealth matters because it enables you to be free from worry, and it enables you to live life on your own terms. It means you can do what you want, when you want, wherever you want, with whomever you want, for as long as you want. You get there when you have passive income (coming from something other than your work) greater than your burn rate.
Being rich on the other hand, that’s about driving a $100,000 car and living in a luxury home. That’s easy to spot and it’s easy to be drawn towards it.
There is a cross-over between wealth and riches. Some truly wealthy people also appear rich, but an awful lot of rich people aren’t truly wealthy.
Building wealth is about one thing more than anything else. It’s about your savings rate. Yes, returns and your timeframe matter, but not as much as your savings rate.
There are only two ways that I know to save more. The first is to earn the same and spend less, and the second is to earn more whilst not increasing your spending to the same extent.
Neither are easy. We are human after all.
Let’s focus on the second for a minute. When we earn more and spend more we succumb to what we call lifestyle creep. I have previously talked about avoiding lifestyle creep. It’s something I have changed my tune on recently. I realise it’s naïve to think that anyone is going to spend the same when they are earning $1m as when they were earning $100,000. And I don’t think you should spend the same.
However, when we blindly and unconsciously expand all parts of our life in response to higher earnings, we hit trouble. If we buy the bigger house, drive the fancier car, drink the more expensive wine, take the more luxurious trips, wear the designer clothes – all at once, then we never increase our savings rate and financial freedom gets further and further away. In fact, the only way we will get there is by taking a massive step-back in lifestyle.
What we have to do instead is consciously create our own rich life. We have to decide what parts of life are important to us, align with our family values, and direct our increased spending to those areas only. Most people are living their life entirely unconsciously and unexamined - in all aspects actually, but particularly when it comes to their financial life.
Ramit Sethi explains it; ‘The most successful people I’ve met are all very conscious about how they spend their money. That doesn’t mean they don’t spend at all. It means that they choose HOW and WHERE to spend their money, and are unapologetic in allocating significant resources to live a better life.’
Conscious spending will not only lead to increased savings but it will lead to a happier life.
And remember, saving is not always about a specific goal. Morgan Housel writes: “You can save just for saving’s sake. And indeed you should. Everyone should. Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”
Georgie
georgie@libertywealth.ky