“We buy things we don’t need with money we don’t have to impress people we don’t like.” – Dave Ramsey
It’s not how much money we earn but how much of it we keep that matters. We may have heard other people say they have earned millions over the course of their long careers and yet have nothing to show for it. One main difference between the rich and the poor is that one is a good converter of wealth while the other spends everything they earn. If Joe is earning $500k a year but spends $500k a year, he is not rich, just living high. Yes, people will perceive him as affluent, but if he were to lose his job today, how long can he sustain this lifestyle? Below are some definitions and a comparison between Prodigious Accumulators of Wealth and Under Accumulators of Wealth.
Definitions of Terms:
Average Accumulator of Wealth – A person whose net worth is defined by this formula:
Age in years * Annual pretax income * 10% = Expected net worth
A 40 year old person earning 100k a year should have a total net worth of 400k to be called an average accumulator of wealth.
Under Accumulator of Wealth (UAW) – A person whose net worth is at least 50% less than the expected value using the formula mentioned. They are unable to convert their income into wealth.
Prodigious Accumulator of Wealth (PAW) – A person whose net worth is at least twice the expected value using the same formula. They are good at converting income into wealth.
Wealth – A person’s actual net worth, defined by this formula:
Total assets – Total liabilities = Actual net worth
Parkinson’s Law of Money and Wealth Accumulation – One’s expenses rise in direct proportion to the rise in one’s income.
Below is a comparison between UAWs and PAWs:
| UAWs | PAWs |
| Spend tomorrow’s cash today | Save today’s cash for tomorrow |
| Live above their means. Spend as they earn, or worse, spend more than they earn (augmented by credit) | Live below their means. Spend significantly less than what they earn. Accumulate savings and use it to invest |
| Follow Parkinson’s law | Understand that the key to financial independence comes from violating Parkinson’s law |
| Frequently buy status objects that lose their value once replaced. These items have a high sunk cost. Spend a lot of time and energy getting a “bargain” to acquire these | Buy investments after doing thorough research into them. Usually indifferent to status objects |
| Buy current model cars, often on credit. Put a high premium to the pride of owning brand new | Prefer to buy used cars, aware that the depreciation is highest during its first two years. The price difference is not worth the pride of owning brand new |
| Have the “Keeping up with the Joneses” mentality. They measure their success in comparison to what their neighbours have | Focused on improving their financial wellbeing, irrespective of what their neighbours have |
| Possessed by possessions. Their wants become needs | Aware of the difference between wants and needs |
| In cases where they grew up in poverty, they have a propensity to show off their improved status in life. Items such as a big house, expensive cars, and luxury goods need to be prominently displayed to contrast their current life from their humble beginnings | Regardless of their economic background, they learn from their PAW parents that true wealth is acquired by purchasing assets, accumulated over time. |
| Maximise their active income to pay for their hyperconsumption lifestyles. They are often on the highest tax brackets | Have, or work toward acquiring multiple passive income streams. They are tax-efficient. |
Which of the two are we choosing to become? Do we want to act rich or BE rich? One could make us feel hollow, pretentious, and ultimately dissatisfied. The other could give us true happiness and contentment because we achieve this status by utilising all of our faculties. It is slow and steady, choosing to make it so we don’t have to fake it.
“At last I have what I wanted. Am I happy? Not really. But what’s missing? My heart no longer has that piquant activity conferred by desire… Oh, we shouldn’t delude ourselves — pleasure isn’t in the fulfillment, but in the pursuit.” – Pierre-Augustin Caron de Beaumarchais
Fifth friend 