Why become wealthy?
So you want to be wealthy and use property to get you there. Well so do I, but did you ever think about what wealthy means to you? Is it just being rich or maybe there’s more to it? Most will agree that money without having family or friends, without having your health or without having time to enjoy your money is not the complete picture. Sure money is an important part of the wealth equation, but only to the degree that it allows you to make the choices you want to make, after that it won’t increase your happiness.
As Harvard psychologist Daniel Gilbert writes in “Stumbling On Happiness”:
“Economists and psychologists have spent decades studying the relation between wealth and happiness, and they have generally concluded that wealth increases human happiness when it lifts people out of abject poverty and into the middle class but that it does little to increase happiness thereafter.
Americans who earn $50,000 per year are much happier than those who earn $10,000 per year, but Americans who earn $5 million per year are not much happier than those who earn $100,000 per year.
People who live in poor nations are much less happy than people who live in moderately wealthy nations, but people who live in moderately wealthy nations are not much less happy than people who live in extremely wealthy nations.
Economists explain that wealth has ‘declining marginal utility,’ which is a fancy way of saying that it hurts to be hungry, cold, sick, tired, and scared, but once you’ve bought your way out of these burdens, the rest of your money is an increasingly useless pile of paper.”
So wealth will not automatically give you happiness, but it can give you freedom to choose what you do for a living and for how much longer. And that can be a great contribution to your happiness.
One more important reason to create wealth is the security of your pension – inflation eats away at your future buying power and the aging of our societies will continue to put more and more pressure on the levels of old age pension until one day we may find that the old age pension does nothing more than keep you alive – is that how you want to spend your retirement? Surviving or would you rather be thriving?
Creating Wealth
To become wealthy you first need to create a capacity to generate wealth and in simple terms that means that you generate more income than you spend.
Capacity to Build Wealth = Income – Spend
You have to manage both Income and Spend and this is where the majority of people in western countries go wrong. They focus nearly all their attention on their income and do very little to control their spending. If anything over the last decades the modern day consumers have become used to the concept that if they want a new car or the latest greatest flatscreen TV they don’t have to first save for it, they just buy it on credit, that is with tomorrow’s money, money they don’t yet have. They’ve deserved it haven’t they. In fact it’s their right isn’t? Sure, whatever, just don’t complain if you never get ahead because you’re paying double-digit interest rates on multiple maxed-out credit cards. And when the bubble bursts, as it is doing right now, you might want to learn a thing or two from the average Chinese, Indian or Vietnamese worker who has been lending all this money to the average westerner for the last couple of deceades. Asian families have double digit saving rates.
Want to know more about building wealth, how the average American is doing and more interestingly who the average Millionaire is? Read The Millionaire Next Door. Great read in my mind and a book that despite some repetition really opened my eyes and got me working. Definitely worth buying.
Who becomes Wealthy
Building wealth can not be be left to chance, if you do not take positive action to create wealth you will end up at the wrong side of the statistics: if we consider 100 young Australians today and see where they would be at the age of 65, you’d find the following:
24 would be dead, usually by avoidable causes, as life expectancy in Australia, just like most Western countries around the world is well over 70, pushing towards 80
54 would be on government pension of around $ XX,XXX per year (in today’s money) – but that is hardly wealthy. More surviving than thriving.
16 would still be working, mostly because they had to, not because they wanted to. Similarly, in the US one in four Americans has to work till they die just to put food on the table.
5 would be considered financially independent, but only just. They have sufficient wealth to support themselves and can afford some luxuries like a nice holiday once a year, but they will still need to watch their expenditure carefully to stay financially independent.
And 1, just one out of a hundred will be wealthy.
One important warning.
Many people get caught up in appearing to be wealthy, instead of becoming wealthy. They spend what they earn or more and in doing so they accumulate bad debt instead of good debt, leverage themselves to the hilt. And then they are surprised that Joe who owns his own trucking business is a millionaire and that the only millions they have are those they owe to the bank. The current credit crisis will stop some of this consumerist behaviour for a year or two – per haps longer. But oncs the good times are back they’ll get themselves back into trouble. Nature of the beast, I guess.
Managing Risk
Life is a risky business, not one of us is going to get out of it alive. You could try to avoid all risks in life and do nothing, however, you will just risk wasting your entire life. Now there is a risk I most certainly would not want to take!
