Spending Money You Don't Have? Sucker!

Nothing Wrong With Spending Money... If You Actually Have It

Today's article is about differentiating between the following:

• The Luxury of Being Rich and Spending Money You Have
• The Stupidity of Acting Rich and Wasting Money You Don't Have

I hope you can realize the difference. I've written this article to induce you into a mindset where you can start to free yourself of stupidity, save more money, have more freedom, and put you on the path of psychological and financial freedom. After all, the successful journey is 90% psychological, and just 10% financial. I can tell you that having your mindset truly converted is the hardest part of the journey.

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A few weeks ago I journeyed across the village to attend the wedding reception of a good friend of mine. I live on the west side of town... the reception was at a home on the east. As you can imagine, there are lots of jokes that fly back and forth about the living conditions on the two sides of the freeway... 

The home hosting the reception could more accurately be described as what I'd call a "villa." It had a private driveway, three stories (above ground), stone-faced architecture on the home, manicured shrubbery, an on-property guest house, a swimming pool, a tennis court, and a basketball court. I didn't even go inside the home, but I would guess that the pleasantries continued inside as well.

Don't get me wrong: I thought the property was awesome. Now, I live in a decent neighborhood, but this place was much beyond my home.

There are many people in this world who genuinely are wealthy... they really do have enough money to spend it on whatever they want (like the home I talked about). Power to them! It's their wealth to dispose of, and I don't condemn the behavior. 

What pains me are those suckers out there are not really rich, but think they are, or want to be, so they mimic the rich by tricking or convincing themselves to rationalize buying things that they can't afford, with money they don't have. I do take genuine issue with this kind of stupidity.

Pound-Foolish to the Max

I actually have a few friends who fit this mold like a glove. One of them makes about the same wage as I do... but he never looks at his paycheck. Doesn't even know how much he takes home Couldn't care less. That's because his wife also works, and makes double or more what he does. So although together they together make a great wage, their expenses are absolutely through the roof. 

They own a nice home (but got the down payment from parents as a "gift"), and two brand new cars (which they constantly are trading in and up). They just paid $20k (had to take out a home equity loan) to redo their entire lawn. They always buy the new iPhones straight off. Their kids are enrolled in what amounts to Ivy-league preschool at a cost of $20k+ per year. Basically, if they want something, they buy it.

But here' the interesting thing. He's a penny pincher when it comes to investments. Although he very actively trades his investment accounts, he will buy a speculative stock, and never have an exit strategy, either on the upside or the downside. He will NEVER take a loss to lose a penny. He'll hold the stock for a decade in hopes of it returning. He squeezes pennies when it comes to his investments.

But he won't hesitate to drop $300 on a new watch this month, or buy a sweet car one day, then sell it a year later for significantly less because he's tired of it. One car flip this year cost him $834 per month in losses!

Yet, he is so "cheap" in his mind, he won't ever go out to lunch (that is actually a smart decision, so he gets credit there).

My friend thinks he's rich, but in reality he's stupid. He doesn't really have money, but he spends it anyway. He's a sucker.

He thinks he's made of money--and he would be, if he just made smarter decisions with it. If he lived a more conservative lifestyle, he and his wife could work for just 3-4 more short years and retire, comfortably. That is, if only they were better savers, and not as skilled at wasting.

My other friend is even more dumb. He's 35. He makes less than I do and I am substantially younger. He owned a home for just four years, and he just sold it for break even price. They didn't have a dime in equity left in it (by contrast, we've owned our home for 1.5 years and own 12% of it). They never made extra payments, and the home actually declined in value while they owned it. He has two cars, on leases (which he thinks is smart), brand new this year. He just took out a personal loan for some other student and credit card debt he has that he thinks is smart to "consolidate." But, apparently the debt situation isn't so bad that he can't eat out every morning and every lunch (and he does). In truth, this guy is drowning, and he isn't even aware. He and his family are actually living with his in-laws now. At 35.

His financial future is getting suckered by his own silly habits.

For me, making bad decisions with money comes with significant baggage. I would be psychologically damaged if I made payments on a home for four years, then had to sell it break even. Even worse, if I had to move back in with my in-laws when I was 35, my life would be over (and I actually love my in-laws, we get along great. It's the principle of the thing). I take steps in my life to make sure these bad things aren't happening of my own volition.

Both of my friends, while they are at very different levels of income, are incredibly sucky at money. My older friend with the high income could be retired before his first child is ten years old. But he can't control the spending. The other friend has absolutely no hope of ever retiring, unless he changes his mindset. His expenses are so high now, and his ideas about money are so contorted, that even if he gets a higher-paying job soon, I guarantee that his expenses will go up quicker than his income did.

What "Wealthy" Truly Means

What's my point in all this? If you want to be truly wealthy, you need to understand what that truly means. Are you wealthy if you have a sick mansion-house, BMW's, and a boat in the driveway, but are forced to work every day for the next 40 years to keep that ponzi scheme of debt rolling? Or are you wealthy because you have money in the bank that generates enough income for you to live without working, so you can spend all your time doing just what you want, taking orders from nobody?

It's obvious. You're either slave to possessions and the forty-hour work week, or you are an emancipated Villager with freedom of choice. One of them is wealthy. One is a sucker.

If the friends I mentioned above are reading this and you have identified yourselves, take heed. I'm not trying to embarrass you, I'm trying to embolden  you. I want you to be bold--join the Village, become our blood-brothers or sisters, straighten out your financial lives, improve your savings habits, decrease your spending levels, and retire in a few years. I beg you. You are my friends, and I only want the best for you.

I just finished re-reading the classic book The Millionaire Next Door. It's an awesome book that is based on surveys and anecdotes about the mindest of actual rich people (people with high personal net worth) versus people who own a lot of things and appear to be rich (people with basically negative net worth). It's a good read to help you get the mindset of someone who actually knows what they are doing with money. You'll also find tons of examples in the book of how to suck at your personal finances, which I hope you will take to heart.

I wouldn't call myself rich by any stretch of the imagination... but I'm sure being rich is fun. I'd love to have money to spend on a swimming pool... although even if I did have that much money, I don't think I would spend it on something like that.

Swimming pools.... fancy cars... mansion homes... shiny crap in your garage... and spending money on anything else you want, when you don't really have the money, makes you a sucker.

I just don't see this all as the best part of being financially independent. It's not what I look forward to. The greatest thing about it all has to be the peace of mind, knowing that no storm on the horizon has the ability to bankrupt you. You sleep well at night, sleep in in the morning, and have firm control over every aspect of your life. It's liberating. I can't wait to get there.

Live long and invest,

Jeremiah