By Dr. James M. Dahle, WCI Founder
There are a number of ways in which the wealthy differ from the poor or even the middle class. When I refer to the wealthy, I’m not talking about super-wealthy celebrities like Oprah Winfrey, Beyoncé, or Peyton Manning. I’m referring to the simple multi-millionaire, a status anyone with a physician-like income can achieve eventually with a reasonable amount of hard work, discipline, and planning.
Perhaps the most significant difference between a physician destined to remain poor and one who will become a multi-millionaire is mindset. The wealthy, and those destined to become that way, (often referred to as HENRYs- High Earner, Not Rich Yet), simply think differently from the majority of their peers in six distinct ways.
6 Ways the Wealthy Think Differently from You
#1 The Wealthy Think Long Term
More than anything else, those who are poor and will stay that way aren’t thinking about their life in 20 years or even five years. They’re thinking about Friday night, or worse, what they’re going to have for lunch.
The wealthy, as a rule, are planners and started planning their retirement in their 20s when they received their first paycheck. When the middle class gets around to thinking about retirement, typically in their mid-50s, the wealthy are doing estate planning to try to figure out how many generations they can make their wealth last.
When an automobile needs to be replaced, Middle-Class Mike buys a new one on credit, because he didn’t realize that car would need to be replaced someday. Wealthy Willy purchases the car with cash, with money he’s been setting aside for that purpose for years.
When considering whether he can afford something, Poor Peter thinks, “What is the payment and how does that relate to my income?” or “How can I make the payment lower?” Rich Rick thinks, “What is the least expensive way I can acquire this item?” If it must be bought on credit, Wealthy Willy and Rich Rick figure out how to minimize the interest paid, or at least compare the interest rate to their expected investing returns.
#2 When Spending, the Wealthy Focus on Quality and Happiness
When a wealthy person purchases an item, she focuses on its quality more than its price. It is not simply “If you have to ask, you can’t afford it.” She has learned that a quality item will often be less expensive in the long run because it will last longer due to its superior craftsmanship. More importantly, she has a priori determined how to spend in a way to maximally increase his happiness.
Once she has decided that a nice car will make her happier than a new boat or a vacation or retiring earlier, she saves up for and purchases the nice car. She derives pleasure from the entire experience—saving up and anticipating the purchase, making the purchase, and using the purchase afterward without having to worry about making future payments for it. It isn’t that wealthy physicians don’t spend, it is that they spend deliberately.
#3 The Wealthy Have an Ownership Mentality
As a general rule, the wealthy prefer to be owners, rather than employees. An employee’s income is always capped at her salary, but a business owner has infinite income potential. A business owner never pays an employee more income than she can generate. If she did, there would be nothing left over for profit.
When a business does particularly well, those who own it derive the benefit. When it does poorly, the owners do poorly. But so do the employees, since they lose their job. All the downside and none of the upside.
Likewise, the wealthy prefer investments where they function as owners. This means investing in their own businesses and those of other people, whether privately owned or publicly owned (i.e. the stock market). They also invest in real estate, where they can collect (and increase) rent and benefit from appreciation. They invest, rather than speculate, holding their investments for decades rather than hours.
Meanwhile, the poor invest in bank accounts, CDs, and similar investments, if they invest at all.
#4 The Wealthy Focus on Providing Value to Others
It is almost a universal rule that a successful business owner is far more focused on her customers than on her bottom line. She knows that if she provides value to others, the money will eventually take care of itself.
In addition, after reaching a certain level of success, the marginal utility of additional income to the owner declines markedly. If she continues to work, she does it because she enjoys helping others and building something of value. It truly isn’t about the paycheck every other Friday, and that focus on others breeds even more success.
#5 The Wealthy Put Themselves in a Position to Take Risk
While it is true that the wealthy are often far more willing to take significant risk in their careers and with their investments than the poor or middle class, they are also experts at getting themselves into a position where they can afford to take that risk.
They avoid consumer debt, like credit cards and auto loans. They minimized their educational debt, and paid it off faster than their peers. They live on a fraction of their income, allowing them to have cash continually available for additional investments. They minimize their fixed ongoing expenses through debt reduction and deliberate spending. They keep enough money in safe investments that they can afford to lose a job, start a business, or take care of a family emergency without having to tap long-term investments or retirement accounts.
They also know their worth in the marketplace and are continually improving their skills and knowledge so they will be worth more each year to their clients and/or employers. Confidence breeds success which breeds even more confidence. In many ways, those destined to become rich literally will themselves to become wealthy through the power of focus.
#6 The Wealthy Become Financially Educated
The rich learn how to speak the language of finance and investing. That doesn’t necessarily mean that the wealthy don’t use financial, accounting, or legal advisors. However, they know it is impossible to have an intelligent conversation with a financial professional if you can’t even speak their language. Inflation, depreciation, deductions, Roth IRAs, long-term capital gains, and other terms are all just simple vocabulary to the wealthy, but they might as well be Chinese words to most Americans. The wealthy pass this language on to their children, giving them a competitive edge in their schooling and careers.
The wonderful thing about all of these habits and knowledge is that no one is excluded from developing them. While there is plenty of income inequality in our society and undoubtedly factors beyond your control, a certain amount of your own financial success lies entirely within your control. Develop the mindset of the wealthy and achieve your financial goals.
Do you agree the wealthy think differently? Is that innate, or can it be taught? What have you done to change the way you think about money, saving, spending, and investing? Comment below!
[This updated post was originally published in 2018 at MDMag.com.]
Mindset is everything in life. We all follow scripts in life based on how we think. We follow these scripts as if they are rules of life – like deeply held beliefs akin to a religion. “I’m a Doctor and I’m supposed to …” is such a belief system.
Having a rich life full of quality, relationships, and experiences doesn’t take money. It takes time and you can’t buy time.
You *can* buy time by acquiring enough money to not need to work.
Nobody can buy time, and it includes present time. Time is the most precious thing we have.
Don’t waste current time in expectation for future spending of time.
And why shouldn’t anybody work?
When I speak of rich life full of quality, relationships, and experiences, it includes all of those at work as well. Work is a wonderful source of creating wealth.
Pursuing Financial Independence at the cost of current time and life is detrimental and is not part of a wealthy mindset. The true wealthy never stop working. The trick is to do the work you like in the present and do only as much is good to create enough- all very personal and subjective ideas.
As far as wealth goes, people who work longer end up accumulating more wealth by doing even less work. Marathoners beat sprinters in wealth creation every time.
Dr. S, I agree with your overall premise, but I think about it differently. Maybe it’s just semantics; but, to me, money and time are completely interchangable. We work using our time at a career we hopefully enjoy, are compensated pretty well with money for our time, and can then use that money to buy services/goods that increase our time and enjoyment away from work which includes saving for a time we can no longer work. So, to me, money does buy time. The balance is calling the personal point of enough.
Money and time are interchangeable but they both have value, how much you put in and how much you get out- kinds like your comment about learning to bill better. Just like money has marginal utility, time has it too. I still don’t get it why work is seen as such a bad place that the only time you can have positive life is away from work. It is different if you cannot work. But good time spent at work has just as positive effect on life. Again the work time has marginal utility.
I know my limits at work and it is so much enjoyable. And then I meet my capacity to work and then I spend time doing things away from it – in the present time, not in the future. I have always worked 3-4 days a week, and take off 8-10 weeks each year.
Great attitude! It’ll take you a long way.
I enjoy my job. But I can think of at least 10 other things I’d probably enjoy working at even more. The difference is that no one is willing to pay me to do those things. The earlier I can start paying myself to do them the better, I think.
+1
Wealth mentality is a distinctly different way to process thoughts around financial decisions that is not baseline for everyone. However, it never to late to change someones views of consumption, so I do feel that it can be taught.
Instead of buying a product a company sells, buy a piece of the company and become an owner. It changes the view you have even for the products and how you appraise them as part of your life and whether or not they are quality items as mentioned in the second point. If becoming an owner through stock ownership doesn’t inherently resonate right away, think of it as helping build something that is adding value to the world. Invest in companies working to add value to the world in a way that resonates, and gradually build from there.
Interestingly this mindset (particularly when it comes to investing) is not always a born-in genetic trait. Many of us (particularly physicians) are at heart planners, but it isn’t until our 30s or later that we stumble onto sites like this, Bogleheads, or the right book, and it often starts a chain reaction that puts on this path. Thank you Jim, for being part of my conversion!
When you stop thinking in terms of salary or income and start thinking in terms of net worth then you have made the leap to having a wealthy mindset.
A wealth mindset can be thought of in terms of materiality. Most in college that is $10 to $100.
Jump to any job and it’s $1000, then $10k and so on. One gets to a point income or net worth become cash flow questions only, procedural. Putting money to work productively is the goal.
Frugal habits can be maintained. I once had a business partner that wanted to personally review everything expense report in the small business.
Worked out a financing deal for 10 trucks at $120k each. The business could handle it and needed them. Rather than sign the financing deal, personal check for $1.2 million with interest at half the rate and get with the attorney to write up the loan agreements. Money to be put to work. He said the half rate interest was his 50% ownership.
Initial investment was $250k cash and the other 50% was the old 10 trucks. Six years later we sold the company for $13 million net. Of course he had a plan to build a cash cow based on synergy with other businesses he had. It wasn’t rate of return, it was materiality. Every expense report had his initials, whether it was $5 or $10.
Pay attention to the details, but focus on items that are material to your cash flow. Activity traps aren’t worth your time. A wealth attitude is to pay attention to you business with the cash flow to handle hiccups.
Another difference is evaluating the price of something not buy how much the payments are very month, but the total cost.
I don’t get the whole “don’t buy a car on credit” line of thought. Sure, don’t over-buy based off of the “four box model” or other stupidity. If the same vehicle was going to be bought either way, though, why not finance it at 0, 1, or even 2%? If it was paid for with cash that implies a car’s worth of cash drag in the portfolio, and if one would have withdrawn the money from an investment account to pay for it, why not finance and continue to let that investment account toil away on your behalf in the meantime?
Your argument is a mathematical one that is correct. Mine is a behavioral one that is also correct. How you reconcile the two is up to you. Personally, I think it’s silly to finance something I can purchase out of next month’s cash flow. For me, a car falls into that category. I mean, how far down that rabbit hole are you going to go. Will you finance a new roof? What about a dishwasher? How about a meal at a nice restaurant?
The correct answer would be to finance all of those thing if you rate of return on investment (minus expenses) is greater than the interest rate. In the expense column I’d include time spent on and inconvenience of dealing with financing.
Your behavioral argument is only correct if for some reason financing these things would change your purchasing habits in a negative way. You don’t seem like someone who would consume differently if you adopted this strategy. But I guess if I’m wrong on this, then I’ll accept the behavioral argument.
The reason I don’t finance a lot of those things personally is the time factor. In the vast majority of cases the time and inconvenience of dealing with financing would outweigh the gain if I invested and financed at a lower rate.
It would probably be worth it for a car. I’ve got no idea what a roof costs. For a dishwasher it would almost certainly not be worth it as merely the time spent filling out paperwork for the financing would probably be worth more than any gains I could make if I financed it and invested at a higher rate. Ditto for a restaurant meal.
So at the end of the day, it’s just a math problem.
The path to wealth is never just a math problem. Behavior matters more. The reason not to finance is because the investment return is unknown. You must factor risk into your math. But, as it is unknown good luck with that.
I never said that the path to wealth was a math problem. I was just talking about a small part of it that happens to be a math problem.
Your whole reason not to finance is because the investment return is unknown is just wrong. It’s not wrong that that’s it unknown, it’s wrong as a reason not to finance.
You even give the reason why it’s wrong. You factor the uncertainty into your calculations. This may make it a slightly more difficult math problem, but we’re still left with just a math problem. I don’t think one needs luck to figure it out, just a basic understanding of math.
I still respectfully disagree. Math is not a crystal ball. Garbage in, garbage out idea. The very idea that you would get a “certain” answer after factoring in uncertainty is amusing.
Well if you’re certain that financing is worse because “the investment return is unknown” all your doing is applying a risk adjustment that is far different from what most rational investors use. So I suppose garbage in, garbage out applies. On that, we wholeheartedly agree.
To be honest I’m not sure what you even think we’re disagreeing on. We both agree that “the path to wealth is never just a math problem”. When you say that the “reason not to finance is because investment return is unknown”, you are making a mathematical judgement. In my view it is a poor one. But poor attempts at math are still math.
I think the problem here is that you may not understand math very well. Basically what you’re doing (in your case subconsciously) is you’re making an expected value calculation of two different courses of action and determining that one course (i.e., not financing) has a higher expected value or may reduce your variance so dramatically that you’re willingly sacrificing expected value. Expected value by it’s very nature is uncertain. That doesn’t make it not math.
If you scroll up, you’ll see that I never claimed any sort of certainty that financing is better. I merely claimed that determining whether financing is better is a math problem. It is better *if* certain conditions are met. Those conditions involve rate of retrurn (risk adjusted), interest rate, value of your time, etc. That’s the issue.
The main behavioral argument that applies (to this specific scenario), is “Well if I finance stuff, then I’ll spend differently and that’s bad”. If that’s not true for you, then the financing issue really just comes down to a math problem. If that does apply to you (or anyone else), then yes financing lots of things you could pay cash for may be a bad idea.
Quite the tirade. Given this example of your behavior I definitely agree that you should favor math over behavior whenever possible in your decision making. Best wishes.
[Inflammatory comments that added little to the discussion removed.] Good luck in your future endeavors.
[Ad hominem attack deleted.-ed]
Don’t forget there are hidden costs to financing a car making the transaction not a huge win over paying cash.
When financing many will get that extra item because it is only a few dollars extra a month. Also a financed car has more expensive car insurance. Also take into account the variability of your rate of return in the market over your 3-5 year finance. Lastly if this cash is invested in a taxable account, you will be paying taxes on dividends as well as taxes on some of the withdrawal.
To see it in action you would have to create a spread sheet and run the numbers payment by payment. I did this once.
Once you add in all the added cost of financing, you maybe ahead by $1,000. I would gladly pay the extra $1,000 now to avoid the hassle and the risk of market returns as well a keep my monthly basic expense lower.
I didn’t know it costs more to insure a financed car. This article suggests it is true though: http://www.autotrader.com/car-tips/buying-a-car-why-insurance-might-cost-more-if-you-finance-227942
if for no other reason than the bank may require a lower deductible than you would otherwise take.
Has anyone called their insurer to find out how much more insuring a financed car costs? The article didn’t provide concrete numbers.
There is additional hassle down the road for financing something. Take your car for instance. Sure, you finance it at 1%. Now you’ve got to make sure the payments get paid every month and pay attention to that cash flow. You’ve got to make sure you have sufficient income to cover that expense each month. Also, if you sell it before it’s paid off now you’ve got to go down to the bank and get the lien removed. Plus there is the fact that the investment you’re comparing to must be corrected for both taxes and risk.
However, I view NOT having to finance things like cars at a low rate of interest and investing the difference as a luxury good. Rich people can pay money to remove hassles from their life. They can pay someone to mow their lawn. They can pay someone to clean their house. They can work less. They can take less call and fewer night shifts. They also don’t have to worry about eking every possible gain out of their financial life by financing their dishwashers and cars. As Dave Ramsey likes to say, the paid-off mortgage rather than the BMW is now the status symbol of choice. For example, yes, I could make an extra $3K a year by keeping my mortgage and investing the difference in a bond fund paying 4%. But the fact that I don’t have to is a luxury good and darn it, I’m rich enough that I want and can afford that luxury good. It’s an even cheaper luxury good when it’s a car. For instance, you buy a $20K car at 1% and decide to invest the difference in that bond fund paying 4%. We’ll call it 3% after taxes. Maybe 2% if adjusted for risk. So 2%-1% = 1%. So this financing is making you 1%*$20K= $200 a year. The poor guy needs that $200 to make his finances work. The rich guy doesn’t. It’s a luxury good. And that’s ignoring behavior completely.
Another example might be how much money you keep in your checking account. Obviously, it’s better to have money in a 1% savings account than a 0% checking account. The rich guy can afford to leave an extra $15-20K in that checking account so he can follow his cash flow less closely. The poor guy needs that extra $150 a year. Mathematically, it’s better to run that checking account as close to the minimum that avoids fees as possible. But a great thing about money is using it to make your life easier and eliminate worries so you can focus on what makes you happy.
I’d agree with most of this. It (especially for you) is just a math problem. You look at how much money you would make by financing and then you weigh it against the value of your time and how much the convenience is worth to you. Behavior doesn’t enter the equation, unless you would consume differently in the two scenarios, and since you most likely wouldn’t, there’s no behavioral justification for not financing stuff when you can.
Of course that does not mean that for others (i.e., most people) that consumption habits would not change if they financed more. Those people would have a behavioral justification for not financing things even if they could invest at a higher rate.
I’m not convinced I’m immune to standard behavioral finance theory. I think very few of us probably are.
I think you’re selling yourself short. But I’ll take your word for it.
Even if you’re not “immune” as you say, it’s pretty darn close, so it’s at least 95% a math problem for you.
Clutter factor comes into play. Monthly payments (even automated) car insurance and you don’t have the title.
Asset based lending does zero to improve credit score but counts in the debt/income ratio used by lenders. The cash or investment is not included.
So if you want to finance a true investment, multiple “financing loans” come off the top. The interest rate/return difference is insignificant from a long term standpoint. If you want return, buy a 2-3yr used car for cash. You will make about 20%. Bargain rates are only available on new vehicles. Manufacturers actually buy the rates down to move inventory. Leasing is better cash flow too. More expensive, over 30 years. Would you fund investments with the payment difference? Clutter.
A one off won’t do damage, why do it philosophically.
IMHO, some types of debt may be better than others, but ALL debt is bad. As Jim has pointed out; the point is about mindset and behavior. If math was the only variable to independence, EVERY doctor would be financially successful since All of us can do simple math.
1. All debt is not bad. That’s ridiculous. As the simplest example you probably run a credit card balance every month. Even it you pay it off monthly, you are in debt for a part of the month. Of course, that debt provides you with massive convenience.
I think I understand the general sentiment you are trying to convey, but having a Dave Ramsey all debt is bad mentality will lead one to making some suboptimal life choices.
2. I think several people including you took my initial comment way out of context. Obviously math is not the path to independence. But a specific part of that path (i.e. the decision to finance stuff) for some people (like WCI) it is just a math problem. But for lots of others it is both math and behavioral problem. Know what kind of person you are and act accordingly.
Behavioral issue is the key regarding debt. Your point regarding credit cards is a great example. Using it for purchases is fine. Using it to “finance” is a behavioral issue. The idea is debt is for leveraging an investment like education, housing and income enhancement.
Consumption should be deferred, not financed. Once that behavioral rule is met, run the numbers.
Debt can be used as leverage in an investment very profitably. Of course the risk goes up if the profits fail to materialize. A liquidity crunch can exaggerate the damage too. Rental property is an example without going into detail. Matching the debt to an investment can work very well.
Student loans for a doctor is an investment in future earnings.
All I would suggest is not completely accurate. Would you consider most?
Also, when purchasing a car, you can often negotiate a lower price if you are paying cash- particularly if the financing of 0% of whatever is dealer financing. So while you may not be paying any interest (or a very low amount) you still may be paying a higher price. Just one more part of the overall equation.
Not necessarily true. My friends who sell cars will sell it for less if you finance because they will make more money over the loan period. Cash, although simple, doesn’t make as much money for them so they are less likely to negotiate. Anecdotal evidence, I know.
How are they making money on a 0% loan?
Financing fees and selling more of whatever they’re selling. Take a look at the solar industry now. 10 times as many people are getting solar than previously simply because it can be financed. The companies are more financing companies than energy companies.
Purely volume. Manufacturers fund the financing deals. A dealer is given 60 or 90 days to move a car. They won’t take more if they have a lot full.
Ah, zero financing is not always available. The manufacturers kick it in to keep units moving. Additional promo’s to dealers to move models.
That gives a dealer more flexibility for moving price.
$3000 off or 0% interest. That’s approximately what your looking at and they still make thousands on each car. Sitting cost money. Move it.
It depends on when you buy. Dealers are eager to sell at the end of the (model) season, or a sedan when everybody suddenly buys trucks because of low gas prices (only to regret that when it’s $3-4 dollar a gallon again). The last three cars we bought were paid in cash and were “brand new.” End of season “last year’s” mid-size luxury car models. For each we paid about the price of a new Honda Accord 15k-20k under KB or Edmunds fair value. They were even 5-10k cheaper than 1-2 year older models with low mileage on the lot (!) and came with the same warranties and 4 year free service. We keep them 8-10 years, depending on mileage and increase in repairs. Try buying a convertible in early March in New England with 20 of them still on the lot. They will happily sell you at a big discount when paying cash: In our case 20k discount, it’s now 8 year old, in great shape, low mileage (short commute) and cruising along. This one we’ll keep for years.
The finance desk makes most of it’s money from:
Loans
GAP insurance
Repair contracts
Add ons like sealants and window tinting.
They don’t make more money on the car itself. Your deal can be negotiated down.
By salesman, they track vehicles and all of the add ons sold. Commissions usually are set by salesman for each item sold, not just the vehicle.
Probably a selection bias among the WCI readers. #6 is why I read sites like this one.
Is it bad that given the wealth around me and in my community I no longer see someone with a net worth of 7 figures as being “wealthy”? 8 figures probably more fits the criteria, but with inflation and the amount of wealth that I see even that is not 10,000,000 does not seem that wealthy to me. Most physicians, even those who are super-savers will find it hard to achieve this level of wealth. Wealth is relative I realize, but in 2016 a “millionaire” does not make one “wealthy” in my mind. This of course speaks of nothing to the non-financial aspect of “wealth” which I feel is more important to life.
There will always be somebody wealthier than you. Consider exploring the concept of “enough.” “Enough” is a different figure for each of us, but having that figure changes the way you live your life for the better.
My family and I were having this discussion about “enough” just last night. How much net worth would it take to make me stop being a surgeon? With an 8-figure net worth, I would continue to work, but it would be different. My hope is that I would be able to buy my way out of the more unpleasant aspects, such as night call. I think the likelihood of this happening depends in part, on the type of practice and the type of partners you have.
8 figures? You must have a very lucrative practice/expensive lifestyle that you wouldn’t change your practice prior to that figure. I mean, a $10M portfolio could support an income of $400K per year. With kids gone and mortgage paid off, that’s an awfully nice lifestyle.
Dr. T, I have to agree with WCI , an 8 figure net worth is not necessarily a financial freedom number unless one has significant expenses. Granted, it is different for everyone of us, but for what it’s worth starting to really look at the expense side of the equation has helped me reconfigure what my “needs” will be as I move closer to retirement. I also think more about cash flow in retirement than actually “the number”. Specifically, what can my assets produce in terms of net cash flow without actually drawing down on the overall asset pile.
Why wouldn’t you want to draw down on the overall asset pile? Do you have some heir who needs several million dollars for some reason? If all you spend is the income on a typical stock/bond portfolio you will die with several times what you retired with.
True…didn’t say I won’t draw down on the pile, just like thinking about leaving my kids in a far better place than I started out in, plus to give to charity. But, you are correct, it’s a bit silly to work and save and not draw down on it in retirement.
I decided that I had enough at 5 mill in financial assets. I quit OB and just do GYN 3 days a week. To be sure you have enough you have to address your spending and understand what will continue and what will not. Cash flow is something I pay more attention to now as well. I am keeping more money in short term muni bonds and a money fund to pay for cars, roofs, dishwashers etc since practice cash flow is not great part-time.
Would love to hear your opinion on the financing discussion Toshi started above! Thx in advance.
Nice move – close to your level soon. Part time is looking better and better, but that darn call schedule won’t go away ….yet. Cash flow is super important as I need to feed the boat…lol
Totally worth it to feed the boat, I agree. I can’t wait to take mine out of storage for the summer. I don’t know that I’ll put the 126 hours on it I did last summer, but hopefully we’ll still get plenty of use out of it.
Nice…good for you! Boating is awesome. Bring On Another Thousand ( BOAT). Or as one Orthopod said to me …” sailing is like standing in the shower ripping up hundred dollar bills”…
My guess is you are younger than me and hence working harder than me.
So, don’t let my estimate of 400+ hrs on the boat last summer bother you but be a goal! ( I’m counting time on the boat not running hours on the motor, as it’s a sail boat)
Looking forward to summer, and just got the gennaker ordered, so light wind sailing here we come!
All good and thx for the hard work on the blog. We don’t always agree, but it’s great forum to exchange ideas.
Well if I get to count hours on the boat…..I’m sure you can at least double it. I know I spent at least 25 days just at Lake Powell last summer. Glorious place. Not a lot of sailing going on there though.
Enough I totally understand….I have this internal debate constantly as to what is enough. When I recently saw what my parents retired on and how good they live….and considered that I already have a larger net worth than they do it puts things into great perspective as to what is enough. I feel like I could easily retire soon with “enough”. However, enough doesn’t make one “wealthy” in my mind. “Wealthy” is a constantly evolving thing in our society. Like I said, 7 figures is definitely “rich” and doesn’t need any more as they should easily have “enough”….but for “wealth” I really think someone needs to be 8 figures in 2016. Just an observation. Once again, the caveat being that “wealth” is only dictated by a financial number….personally I believe “wealth” comes more from non-financial aspects of life but that’s not what this blog is necessarily getting at.
Thanks!
I think any figure more than “enough” is wealthy and any figure less than “enough” is not. That is precisely the definition of wealthy, no? Why should you get to define how much is wealthy to someone else? If you have $5M, and are spending $100K a year, you’re wealthier than the guy down the street with $10M spending $1 Million a year, no? You’ll certainly pass him in net worth relatively quickly! I guess it’s all about how you want to define the term though.
It’s kind of funny. When you survey well-to-do people wealthy is usually 50-100% more than they currently have!
Good points! I guess for some odd reason, I am like the well to do people in your last sentence. I want the 10M but I still live on 100K. Can’t explain it. Metaphor: I golf and want to shoot 67 every round even though I have no reason to shoot 67. I make no money if I shoot 67 vs 77. No one but I will ever know if I shoot 67…yet I still want to score well. Hard wiring issue in my internal drive I guess 😉
It’s like you went through medical school and residency for some reason.
Behavioral Finance is a term most have heard.
Enough is a term pertaining to many topics studied, primarily with regard to complete satisfaction or security achieving a goal.
Salary – double
Savings – double
Housing – double
The basic premise is if I have twice what I currently have, then I am satisfied and won’t be anxious.
Obviously this is not a financial plan. If in ones mind, $2,000,000 is the number, once you reach $4,000,000 no more problems. If you are at $3,000,000 might occasionally think about 20%_30% drop.
Behavioral Finance also shows a propensity to reset new goals, think of spending creep and wealth becoming a scorecard. Internally, guilt is avoided through confirmation bias. Thus, “I earned it” is rationalized. Whether it be travel, cars, sailing or power boats (drastically different) it’s all good.
You will recognize enough easily. It’s the day when you say “I’m not going to work anymore.”
5 million in liquid assets in retirement will suffice for 99% of dentists, I HOPE!!
Hey Ken. Would you be willing to chime in on Toshi’s financing discussion above? Like Hatton, I always appreciate your input and thought process. Thx!
financing the purchase of a car at 0-2% is a no brainer
leasing is usually foolish
If you’re fortunate enough to have a spouse with an S-corp, is leasing via that S-corp still foolish? My parents taught me to never lease, but our accountant thinks it is reasonable in this circumstance. I suspect I should listen to my mother, right? thanks
Listen to your mom! We leased through my husband’s practice once. Even in retrospect it’s still not clear it really was better than just buying. We have not leased since.
Thx Ken. But, why finance if you can afford to pay in full and be done with the transaction? Seems paying in full fits more with your marginal unity comment. Appreciate your thoughts.
marginal utility (silly autocorrect)
Financing promotion offers of 0-2% usually have the word attached “OR” cash back. I wonder why?
It’s called marketing. The numbers are the same.
You simple pay more for the privilege of payments.
Your choice, financial it’s neutral.
Not sure how neutral is a no brainer. Take $2-3k now take the higher price and pay over time.
the wealthy understand the marginal utility of wealth
google it and never lose its meaning
obviously you can earn more on your investments than a zero interest car loan with munis or cds or possibly equities
always take advantage of free money
would you buy a home if you could finance at such a low rate
I would. We are accelerating mortgage repayment even with a low current rate due to sequence of returns risk as we near retirement. I see it as risk reduction, need for less cash flow, etc. Are you carrying a mortgage?
Do you finance your pencils? What amount is too low for you to finance? $100? $1000? $10,000? $100,000? I mean, you’ve got a $5M portfolio that should provide something like a $200K annual income. Do you really need the extra couple hundred bucks a year you can get arbitraging a car loan?
In some ways this comes down to whether you are a maximizer or a satisficer.
Very low or zero interest loans are typically only offered on brand new cars which lose 20% of their value the instant you drive it off the lot, so I’m pretty sure that 0% costs a fine penny. Secondly, when people finance their cars, they typically don’t negotiate the best price, they focus on the payment.
See what a 0% down financed New car compared to a 3 year old, like new same model paid with cash and include the cost of the money (opportunity cost) and see which one has the best, or least negative in this case, effect on your Net Worth.
When you look at investments and purchases and their effect on your Net Worth, rather than your cash flow or income, you’ll quickly see the correct path to wealth.
Always negotiate car purchases and if you lease get a sign and drive quote(no money out of your pocket)
EVERY DOLLAR MATTERS-
Leasing for two to three years on a continuing basis will ALWAYS be more expensive than owning. Why? First, you locked yourself into easily the highest loss of value in vehicles in the first three years on a continuing base.
Second, the timing to lease a vehicle is “as soon as it comes out”. On the contract, the residual value will be the greatest (less to be paid on the lease). Highest purchase price too.
It isn’t hard to find trade in value now.
Third, you will be charged for any damages at a high rate.
Fourth you won’t beat them at the leasing game. Money is made and you are paying it.
Fifth, you lose the option of keeping the car if you wish unless you pay the balance. The residual is not a guess. One company is primarily used. Think of it as a mortality table for life expectancy.
Sixth, you passed up the deal to buy your buddy’s three year old Ferrari. Geez! Should have been buying three year old cars like that all the time.
Sometimes you would have sold at a profit. All you need to do is find out who is selling used cars on low margins. $1,000 per Car still in factory warranty.
Dr mom the only thing that I have ever leased is an ultrasound machine for my office. I pay cash for cars and rarely trade them because I hate the car buying process. My mortgage is paid off. I don’t consider myself rich. Napoleon dynamite you might be living in a high cost area to want 10mill to have enough. I expect through the rule of 72 to have 10mill one day but I decided that I was tired of getting up in the middle of the night and running a high malpractice risk that 5 mill at vanguard was enough for me.
Thanks for your perspective.
I personally pay cash for everything: cars, houses, companies, stocks, bonds, etc. Ken is smart and successful but there is more than one road to Dublin. I don’t fill out loan applications and worry about when to make payments. I don’t know what my credit is and I don’t care. I own a lot of assets outright and I sleep well at night. I work because I love the service that I provide. The extra income is nice but secondary. I could live on margin and arbitrage based on risk etc but why bother? I love my life and have more than enough.
Never wrong to take advantage of free money or very low int rates
Sure it is if you can’t cash flow it. I’d be careful with that word “never.”
The money is not free. The cash back rebate was declined. You could have paid less for the car.
I think financial savvy is a product of environment, both home and work. Having worked in the retirement industry, I saw a “wave of interest” every year, right around the time that a large group of people called it quits. What happened was their colleagues noticed and wanted to see where they themselves stood. If it happened early in their careers, you would see behavior changes which indicated evolved thinking. For late-career employees who were just starting to look at their finances, it was very much a “tell me when and how much” mentality.
My own “wealth accumulation” thinking appears to be both inherited and learned. We didn’t discuss money or saving a lot when I was growing up, but the minute I got interested in saving/investing/early retirement, I discovered a real deep appreciation for its intricacies. Of course, working as a retirement professional didn’t hurt my opportunities for self-education.
In conclusion, a person’s mentality can change. People can learn to “think wealthy,” but it takes discipline, and my theory is that it has to happen at a relatively young age (mid-20s seems to be the easiest route, but really any time before age 50 appears to work).
Agree with the article…
Our Mindset is what determines what we are going to be in future. What we think we become…
Thanks for the article…