My friend will never read this, but that’s not why he’ll always be poor. He (real guy by the way, we’ll call him Steve) will always be poor because he consistently sabotages his future by making poor financial decisions today.
Let’s jump right in.
5 Financial Decisions That Keep You Broke
1. Choosing to finance rather than pay cash.
I still can’t believe he said this…
During a recent conversation about car payments and credit cards Steve made the comment that “It’s not really debt if you can make the payments every month.” So I guess when Beth and I owed $119,000 to several different companies we weren’t really in debt since we were able to make the payments. That makes sense…not.
Here’s the deal. We all know debt is bad. Even “good” debt sucks. So hey, let’s just call it something different. Let’s call it “payments.” So I can get the new car now, because it’s not debt you see, it’s just “payments.” It makes zero sense and bottom line it’s rationalizing poor financial decisions by calling it something else.
2. Buying a new vehicle instead of used.
Steve just bought a brand new SUV (rather spontaneously I may add) 3 years ago. Just two weeks ago he said he was looking at getting a brand new truck, to the tune of $40,000. He would end up paying at least $5,000 more than the sticker price due to the interest, not even counting the instant devaluation of the vehicle the second he buys it. That’s what gymnasts call “upside-down.”
Dave Ramsey says the depreciation of a new vehicle is the equivalent of throwing a $100 bill out the window every week for the first four years. That’s completely wasted money my friends. I have no problem with buying a new car. But you have to know the numbers including the real cost of the vehicle, including the opportunity costs of the things you won’t be able to do with that money.
3. Defining Wealth in Terms of Income Instead of Time
Part of Steve’s blindness is that he doesn’t realize he’s poor because he has a decent income. But wealth isn’t necessarily measured in dollars.
According to Robert Kiyosaki (Rich Dad, Poor Dad), wealth is measured in time. If you were to lose your job today, how long could you afford to live at your current standard of living? If it’s 3 months, then you are “3 months wealthy.” Your income becomes largely irrelevant.
Let me give you another example. I feel almost funny saying this, but Beth & I live in a very nice suburb of Orlando. We live in a condo, but a few blocks from us are very nice million-dollar homes. Ironically, we’ll occasionally find a foreclosure on our morning walks. What’s my point?
It requires a great income to qualify for a mortgage on a 7 million dollar home. Add in the BMW X5 and the private school and you can see how my “rich” neighbors may have less cash at the end of the month than you and I do. Your income can be your greatest wealth-building tool, but if you’re spending your money before you even make it you’re going to end up broke.
Back to Steve.
If he lost his job, he would have about two weeks before he started defaulting on bills and debts (excuse me…”payments”). Actually, he could probably eke out a month by using his credit cards, but that’s not really his money is it?
Here’s where it gets real scary.
4. Increasing Your Standard of Living (and debt) in-line with Your Income
We’re all aware of the danger to increase our standard of living whenever our income increases. But did you know that the opposite is also true? There is a tendency to increase your level of debt whenever your income increases. I didn’t mention this before, but can you guess what the event was that triggered Steve’s sudden desire to go buy a new truck? You guessed it….he had a slight increase in income. Now all of a sudden he has “I-can-afford-it-itis.
I experienced this correlation with debt. I moved to Waco without a job and about $9000 in debt in 2004. My income went up every year after that, but ironically, so did my level of debt. It was like the more money I made, the more I thought I could afford (at least in payments). And since income is such a large factor for banks, they were more than happy to offer me more debt with my increased income. Interesting how that works…
5. Using your Future to Pay For Your Past
Steve will always be poor because he doesn’t understand the power of delayed gratification. He doesn’t understand how interest works and he makes dangerous assumptions about his future income which may or may not come to pass. He is spending his money several years before he has earned it.
Think about how ridiculous and ultimately tragic this is…
30 year-old Steve is making decisions today based on his wants that is going to make it very difficult for 35 year-old Steve just to pay for his needs.
Never count on your future to pay for your past. Never!
Hmmm….how do you wrap up a generally depressing post? I’m tempted to just say “don’t be like Steve!” and end it. But we need more closure than that.
So here you go:
The Joneses are broke. They have financed their futures to look good in the present. Steve is trying to keep up with them…and I have very serious concerns not just for his financial well-being, but for his marriage as well because of the stress that debt puts on a relationship. This is real folks. Your decisions matter, so resist the urge to go out and buy things you cannot afford. The price is often higher than you can imagine.
Comments: Have you made any of Steve’s mistakes? How so?