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Earning Money is Good but Keeping Some of it is Even Better
We all know people around us who are really rich. You know, the guy driving his expensive car from his gated neighborhood to the country club on Saturday morning or the family down the street with the big SUV to pull the boat and the camper (hopefully not at the same time) when they’re not at home watching their 60” Plasma HDTV. Without really knowing their finances though, are we sure that they really are wealthy?
How do you define wealth?
I guess the important question to ask is how do you define wealth? For the sake of this topic, let’s assume we are strictly talking about “financial wealth” here and not “prosperity” as the Bible would define it. Do you define financial wealth as having a certain amount of stuff? Or do you define financial wealth by having a certain amount of money? These two questions seem similar at first but I think that they are actually quite different.
I am technically capable of buying loads of expensive things (I say “technically” because I don’t think I would be around much longer if I came home with a new car and boat and whatever). I have some money in the bank and some credit cards with high limits. So, if I went out and took out a loan for an expensive new car and another loan for an even more expensive SUV for my wife and used my credit cards to get a new wardrobe and all new furniture for my house and a boat (can you buy a boat with a credit card?) and I think it would be awesome to get a top of the line road bike and a sweet new guitar…ok, sorry, I’m back to reality now. So what’s the point of all this is? If I did this, would I suddenly be considered wealthy? I guess it might appear that way, at least until I got the credit card bills next month.
Buying more stuff actually means having less wealth
It would appear that way but it would be a mirage. In fact, I think that doing that would make me less wealthy. I feel that a much better way to judge wealth would be by looking at your net worth. Having a salary of a million dollars a year is a tremendous amount and most people would agree that the person making that much (certainly not me…maybe I should put some ads on the blog) must be very wealthy. But if that person spends two million dollars each year, then they’re much worse off than most of us. In fact, Thomas Stanley and William Danko confronted this exact issue in their excellent book, The Millionaire Next Door (read my review ). When they originally attempted to market to wealthy people, they started looking in the most obvious place – the neighborhoods with the large and expensive houses. They discovered, however, that the people who lived there were not actually wealthy. In fact, most had spent so much of their money on the house and furniture and cars that they did not meet the author’s definition of wealthy based on their net worth.
Use net worth as your guide to financial wealth
So what is the take-away from all of this? Well, a few things….first, I would recommend using net worth as a guide for your “financial wealth.” If your net worth is going in the upward direction, then you are doing a good job of “keeping” more of your money and increasing your wealth. I currently use a spreadsheet to keep track of my net worth – if anyone is interested, I’ll post a tutorial on how I create and use it in a future post.
Do not judge a book by its financial cover
Secondly, do not make judgments about people based on their “financial appearance." The guy at the country club may be a great guy who gives 25% of his income to charity and just has a tremendous amount of money and can easily afford such things. On the other hand, he may have to take out credit card cash advances to pay the lease payment on his status symbol car.
So, I define financial wealth as how much money you have, not how much stuff you pay monthly payments for…is that how you define it?
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2 Responses to “Earning Money is Good but Keeping Some of it is Even Better”
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John,
Your blog is awesome. You have done a fantastic job with the layout, colors, etc. Plus the content is good too. I could not figure out how to get the RSS feed. It asked me what service I used and i have no idea. Anyway, let me find out when I can get some free time from the family so we can collaborate our efforts.
Your friend in Christ,
Fletch
Nicely written, so have you any other information on that, if yes, then please send it to me, I am hungry to read your next post.