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Frugal truth about wealth building: Rich people have deep pockets, short arms – and drive old bangers

Sage of Omaha Warren Buffett, one of the world’s smartest and richest investors, famously drives a relatively modest car. Ditto other rich people. UK Tennis player Sir Andy Murray, for example, has said in an interview that he did not enjoy his sports car and preferred to invest his money in property instead. This seems to be a common factor when you analyse the lives of the rich in South Africa, too. A financial intermediary tells Fin24 that there is evidence to suggest that the more time you spend buying luxury cars, the less likely you are to become wealthy. Apparently petrol heads spend way too much of their time on researching their car purchase options and this is to the detriment of their investment plans. If you are buying luxury goods, you also aren’t particularly sensitive to pricing and are therefore not focused on picking up bargains. The rich, on the other hand, tend to be very price-sensitive. Professionals like doctors, meanwhile, are less likely to accumulate wealth because their need to display social status through conspicuous consumption is all-important. In a nutshell, to grow your wealth, you need a frugal mindset. With some exceptions, it seems the rich have deep pockets, short arms – and drive old bangers. – Jackie Cameron

From Fin24

Cape Town – Surveys show that the more time you spend on the purchase of luxury items, the less likely you are to become wealthy.

The reason is that time and energy are finite resources and research has shown that when you allocate a lot of that resource to the activities of researching and purchasing big ticket items you have less time available to plan your investments, explains Paul Leonard (CFP®), regional head: Eastern Cape at Citadel.

“Many purchasers of luxury cars, for instance, spend a disproportionate amount of time – sometimes for months at a time – researching a particular vehicle before buying it. If they had spent even 25% of that same time planning their investments, they could be much wealthier today,” said Leonard.

“Such buyers often argue that they got the vehicle at cost or even below cost, but when they talk about paying as much for a car as you do for your house they are still massively out of pocket despite the discount.”

Research also shows that people who spend on luxuries tend not to be price sensitive to most things, but they ironically become very price sensitive to paying for good legal and financial advice that would help them get ahead.

Successful wealth accumulators, on the other hand, are price sensitive to most things, but less price sensitive when it comes to buying services that will help them control their family’s consumption behaviour.

Successful wealth accumulators will also happily spend good money on legal and financial advice which they know will help them. “It’s all a question of focus,” said Leonard.

Leonard gave an interesting example:

Imagine that you go to your 20-year school reunion and are catching up with old school friends. You speak to John who says that he got a three-year qualification in mechanical engineering and now owns an engineering workshop.

You also speak to Steve who studied for 14 years and is now a specialist physician with his own medical practice. John was an average scholar and Steve was the Dux in your matric year.

Who is likely to be the wealthier of the two by the time you see them at the 20-year reunion?

Studies have shown that John, with his mechanical engineering workshop, is likely to be the wealthier of the two. There are a number of reasons for this interesting situation.

The first is that John, after getting his three-year technical qualification, started generating an income while Dr Steve still had another 11 years to go before he started generating the income of a fully qualified specialist physician. While John saved money during those 11 years, Dr Steve spent most of what he earned as he worked and studied to complete his qualification.

Let’s say that, once fully qualified, Dr Steve ultimately generates an income three times the income of John the engineer and they both save 10% of their respective incomes. Once he starts working, it would take Dr Steve 10 years to catch up to John with the engineering business.

They would have been out of school for 24 years before Dr Steve caught up to John the builder’s wealth position.

In reality, though, it would probably take longer. Dr Steve would not be able to save 10% from the start of his career because of student debt and he would probably incur even more debt to set up his private practice.

Ultimately, in this story, Dr Steve’s superior income would give his wealth the potential to catch up and overtake John the builder’s wealth. But there is another obstacle lurking out there for Dr Steve to overcome before he achieves that.

Status

This hurdle has to do with the status ascribed to Dr Steve. Doctors and others with advanced degrees are expected to fulfil the role of an upper-class citizen. John the builder would not be out of place in a modest home with a non-descript bakkie or sedan. The cost of setting up and maintaining his domestic situation is much lower than servicing the high status lifestyle that Dr Steve would expect.

Professionals often say that society expects them to live in expensive homes, dress in expensive clothes and drive expensive cars. We judge a book by its cover, often judging professionals by their outward appearance rather than their net worth. And unfortunately for them, the pressure to maintain an impressive outward appearance can restrict the growth of the professional’s wealth.

Another disadvantage of living in affluent neighbourhoods is that you are bombarded with cold-calls from so-called investment experts. In a survey by the authors of “The Millionaire Next Door” some professionals said they had bad experiences with these cold-callers to the point where they will no longer invest in equity investments, thus further impeding their wealth. – Fin24

Source: http://www.fin24.com/Money/Education/education-does-not-always-mean-wealth-20170313

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