Wealth Is What You Don't See

In college, I worked as a valet at a fancy hotel in Los Angeles. When an expensive car drove in, I used to always think, "Wow, he's rich!" But as I got to know these "rich" people, I saw a different side. A few opened up about their finances (people love talking to valets), and I couldn't believe their stories. Some of them weren't that successful. Certainly not like I imagined. Instead, they made modest incomes and spent most of it on a car. It's amazing how fast you can go from admiring someone to feeling bad for them.

I learned something from that. When you meet someone who owns a $100,000 car, you only know one thing about their wealth: That they have $100,000 less in the bank, or $100,000 more in debt, than they did before they bought the car. That's the only information you have.

We rarely think of it that way. So much of our perception of wealth is driven by what we see other people buying. Since we can't see their bank accounts, that's all we have to go on. But it gives us a distorted view of wealth. Some people we think are wealthy really aren't; they just spend most of their income. Others we think of as less well-off are actually the rich ones. They're rich not despite driving an old car, but because of it.

Financial wealth isn't what you see. It's what you don't see.

My colleague Bill Mann wrote a great article on debt, suggesting: "There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don't have. It's really that simple."

That's excellent advice, but I'd take it a step further. The only way to be rich is to not spend money you have. That's the only way to accumulate wealth.

The reason most of us don't ever get rich is because we have conflicting desires: We want to be rich and spend a lot of money, without realizing that the latter makes the former difficult to achieve. When most people say they want to be a millionaire, what they really mean is "I want to spend a million dollars," which is literally the opposite of being a millionaire.

At some point, you have to pick whether you want to be rich or buy stuff. There's no way around it. The arithmetic will win in the end. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (15) | Recommend This Article (47)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2013, at 2:02 PM, ShrikeTheFoolish wrote:

    Short and to the point. Thanks Morgan.

  • Report this Comment On June 20, 2013, at 2:58 PM, jcunning1998 wrote:

    Completely agree!

    If normal behavior is to look rich and be broke, I want to be abnormal...

  • Report this Comment On June 20, 2013, at 4:52 PM, jpanspac wrote:

    My auto mechanic says the same thing. The rich people buy mid-level cars, and the wanna-be's buy the higher-end cars. And the wanna-be's can never afford to get oil changes.

  • Report this Comment On June 20, 2013, at 5:28 PM, watson14 wrote:

    Bill Shakespeare said something like "Have more than thou showest, speak less than thou knowest" - I try to remember that advice!!

  • Report this Comment On June 20, 2013, at 6:47 PM, toastedseeds wrote:

    I thought you had to spend money to make money, no?

    :o)

    ts

  • Report this Comment On June 21, 2013, at 12:17 AM, herky46q wrote:

    You don't want to be a miser either. It is about living a balanced life. I may have spent a few more thousand on a car, but it is worth it because I will want to keep it for a long time.

  • Report this Comment On June 21, 2013, at 8:50 AM, daveandrae wrote:

    By many measures I am considered wealthy for my age.

    I live in an affluent neighborhood. I own my own business, of which, all of the assets are paid for. I own my truck and two Harley Davidson motorcycles outright. (my 2009 GMC Sierra has more than 115,000 miles on it by the way)

    I have more than a 53% equity stake in my house, at an interest rate of 3.5%, with no second mortgage. My one and only credit card is at a 0% interest rate, my debt to tangible equity ratio is 38% and my net worth is currently hovering above $500,000.

    I don't drink. I don't do drugs. I don't smoke. I don't gamble, and I cut my own hair.

    I am 47 and a half years old and believe me when i tell you, I started out 19 years ago sleeping on my Mother's couch AND in a financial hole.

    All of this, and yet, after more than ten years, I am giving strong consideration to cutting my own grass again. When I do the math, the return on invested capital in year one is 21%, and 28% each year thereafter.

    It may take me awhile, but when I see inefficiencies in my finances, I resolve them to my advantage as quickly as possible. In my opinion, this is how the mind of the truly affluent works. I don't love money as much as I loathe the waste and mismanagement of it.

  • Report this Comment On June 21, 2013, at 11:24 AM, astuber9 wrote:

    I feel like I just read a book review of Millionaire Next Door. I think American culture is slowly starting to appreciate this idea more. It is becoming cool to be financially responsible, which is certainly a good thing. Not good for short-term growth with less consumer spending, but great for long-term sustainability.

  • Report this Comment On June 21, 2013, at 11:38 AM, hbofbyu wrote:

    Yes, the truly affluent cut their own hair.

    Actually, when I look at Bill Gates I wonder.

  • Report this Comment On June 21, 2013, at 3:38 PM, stan8331 wrote:

    It's not that you can't buy a certain amount of stuff and still become wealthy. It's more that one's buying needs to be both targeted to a few specific things we care about the most, AND be modest in terms of our overall financial picture. That's the real rub - the things a responsible person buys will never look as impressive as the stuff bought by an irresponsible person seeking to impress others.

    A desperate desire to impress at all costs leads all manner of trouble, in finance as well as other areas of life.

  • Report this Comment On June 23, 2013, at 5:17 PM, EricHawman wrote:

    It really all comes down to what you want the money for. Some people want to FEEL rich. Some just want to be secure. Obviously, the former requires a lot more income.

  • Report this Comment On June 24, 2013, at 7:42 AM, esotericevets wrote:

    Screens and filters harbor us from the hordes about us. Sometimes ostentation well played can be capitalized. Choose to believe the eagle or the large cat as your totem animal with great care.

  • Report this Comment On June 24, 2013, at 10:13 AM, damilkman wrote:

    There is nothing wrong with buying things if it something you want or if it really improves your quality of life. The problem with American culture is we spend money on frivolous things that in the end consume are wealth and give little if anything back in return. These impulse buys are what destroys our wealth be it money spent eating out for mediorce food, 5 dollars every day for an ubercofffee or latee, some clothes or house hold item that may be cute or interesting, or perhaps some bit of media(book, or song) that we feel we might want to read or listen to but never will. It all adds up into thousands of dollars. Before you know it your wealth has died of a thousand cuts. Worse, you having nothing to show for it.

  • Report this Comment On June 24, 2013, at 1:37 PM, daveandrae wrote:

    The one thing I would add about the wealth you don't see is that having money gives you options.

    Decades ago, when I was young and broke, if I couldn't get a ride home from work, I had no choice but to walk....the entire 8 MILES.

    Last weekend I flew into Houston to attend a wedding. Originally I had planned on taking the shuttle which was my cheapest option. However, once I got there, I just decided to rent a car. A picked out a nice 2013 silver Buick Sebring and valet parked it once I got to the hotel.

    This may not sound like a big deal. And it isn't until you start multiplying the numerous decisions you make in a given day, over the course of a lifetime.

  • Report this Comment On October 06, 2014, at 12:20 PM, borracho wrote:

    "I thought you had to spend money to make money, no?"

    No.

    If you don't have money to spend, then how can you spend it?

    If the answer is debt, then you aren't making money because you still owe money, and you aren't spending it - they are spending it, you are working to pay it off and pay interest.

    The truth is, that you can definitely make money without spending it - doing odd jobs like dog walking and baby sitting, selling things, recycling, donating blood, performing a service like writing and selling your work, and so on all cost nothing to do!

    I realize this isn't glamorous and sexy, and is at the bottom of the totem pole for income methods, but the truth is making money is easier than we think, and the belief that we have to spend money to make it is a fallacy. (Not that we shouldn't spend it or invest in ourselves in terms of education and health though).

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