Here’s my latest Monday Money post, part of the series I’m hosting with Emma at EmmaDrew.info and Lynn from Mrs Mummypenny. It’s a great way to share content about money, so do check the links at the end for other brilliant money posts! Plus, find out how to join in if you’re a blogger. We’d love you to add your posts.
What does being rich mean to you?
It sounds such a simple question.
What do you think of? Big houses, fast cars and exotic holidays? Designer clothes, jets and jewellery?
But being rich isn’t actually about having lots of stuff – it’s about having lots of money.
Spend or save?
When most of us say we want to be millionaires, we don’t actually mean we want to have a million pounds – we mean we want to spend a million pounds.
“What most people mean is that they want to spend like they’re rich (or, more accurately, like a rich person on their way to becoming poor).”
When we spot someone with expensive belongings, we assume they are wealthy. Surrounded by social media, we see the haul videos, the shopping bags, the ‘look what I’ve just bought / eaten / worn” photos and assume everyone else is rolling in it.
High earning, higher spending
In fact, all we really know about people with all the stuff is that they now have less money than before they bought it. Or, they might not actually be able to afford the purchase price, but are building up a ton of debt.
Even people with very high incomes may have very little wealth – if they spend it all. Trouble is, as we earn more, we tend to succumb to lifestyle inflation, as our desires rise with our income. Earning loads, but spending even more isn’t a route to riches – quite the reverse.
Think of the headlines about high-earning footballers, actors, pop stars and their ilk who burn bright, burn out and go bankrupt.
Spend money on things, and you end up with things not money. Spend more than you earn, and you’re on a road to ruin.
Wealth is what you don’t see
Last week, J.D Roth, a big blogger in the US over at Get Rich Slowly, recommended reading a piece called “The Pyschology of Money” in his newsletter. (Brace yourself: J.D. added the caveat ‘this is long but excellent’).
The author, Morgan Housel, made a point that really chimed with me.
Housel said: “Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.”
You only become a millionaire if you haven’t spent that million. In fact, building up wealth is based on a whole load of decisions, one after another, not to buy. But if you stash the cash rather than spending it, no-one knows you have a big bank balance or a raft of investments. No-one can see the paid off mortgage, cleared credit cards or bulging pension pot. By not spending, you have nothing to display. Your wealth is invisible.
But that invisible wealth can have much greater impact than being surrounded by stuff. Riches in the bank bring freedom and choice, but riches on your back just bring a big bill.Riches in the bank bring freedom and choice, but riches on your back just bring a big bill. #MondayMoney Click To Tweet
Live within your means
So if even high earners can crash and burn through over-consumption, how can the rest of us build money in the bank?
If you want to be like The Escape Artist, who “when he said he wanted to be rich, actually wanted to be rich”, you need to spend less than you earn. Only by living within your means can you accumulate wealth.
One book about money I really enjoyed is called “The Millionaire Next Door*“. (I recommended it in this post, and am quoted in this round up of the most popular financial books over on Rockstar Finance).
Early on, the authors describe how they interviewed a group of people worth at least $10 million. To make sure these multi-millionaire interviewees felt comfortable, they rented a fancy apartment in a fashionable area of Manhattan and provided a menu of paté, caviar and vintage wine.
But when the interviewees arrived, they didn’t look like multi-millionaires. They weren’t wearing fancy suits and expensive watches. They didn’t eat the fancy food or drink the pricey wine. They were hungry, but just ate the crackers on offer. In subsequent sessions, the multi-millionaires were offered much more economical coffee, soft drinks, beer, scotch and club sandwiches – which they actually enjoyed.
Surprise surprise: the reality is that big spenders, whether on caviar or cars, often have little money left over. And those with big bucks in the bank? They spend a lot less.
The authors of The Millionaire Next Door reckon the three words that describe the affluent are:
FRUGAL FRUGAL FRUGAL
As someone who blogs about living on less, that’s music to my ears. The combination of earning extra, cutting costs and investing the difference will actually create wealth.
The reality is that for most of us, building wealth requires hard work and thrift. That’s a lot less glamorous than splashing out on private jets and magnums of champagne.
But next time you see someone living in an expensive home, driving a luxury car and enjoying a fabulous holiday, remember that they might not actually be rich. Whatever your bank balance, remember that the best things in life aren’t things at all.
To me, true riches are peace of mind. Contentment. Time together with family and friends. The chance to appreciate the small moments in life and the little things that don’t cost a penny. None of those can be achieved by overspending – but all can be cushioned by the stress-relieving safety net of money in the bank.
Now – over to you. Back to my original question: what does being rich mean to you?
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