The Difference Between Rich and Broke

Being wealthy and being broke are two sides of the same opportunity.  Both result from decisions that seem simple.  Most decisions derive from prevailing personal attitudes and wealthy people think differently.

In preparing an estate plan we begin with the idea that all of the money you have now and all of the money you earn or acquire in the future will end up disappearing in just three ways.

  1. You spend it
  2. You lose it, or
  3. You give it away.

If we assume that the part you could leave or give away defines your wealth at any time, then wealth will be what money you receive less what you spend or lose.  Wealthier people spend or lose less than their broke neighbors. That’s how wealth grows.

I think most of us recognize the spend more than you earn problem. With few exceptions, that one cures itself and not often pleasantly.  You cannot overspend forever.

The lose option is more subtle.  Paying more taxes than necessary is obvious.  Failing to insure valuable destructible assets, borrowing that cannot pay for itself, investing with people who cannot operate the businesses they create, trusting the wrong people, the buy high/sell low investment tactic, overconfidence or delusional beliefs about your own business, all contribute.

There are many more, but you get the idea.  Losing is not so simple as owning a stock that goes down.

For people who earn a great deal of money quickly, the problem is more severe.  Young athletes, musicians, actors and other celebrities frequently blow vast sums.

white-bengal-tiger-690x359Mike Tyson earned $400 million in his 20 year career and at the end of it was $38 million in the hole.  Spending money for two white Siberian Tigers and $125,000 a year for their keeper may have been excessive.  So was manager Don King, and no doubt the government got a lot.  Exotic homes and wives did not help much either.

If he had kept just 5% of what he earned he would be a wealthy person.

Basketball player Allen Iverson earned more than $150 million and kept little.  Rapper MC Hammer earned $33 million in 1991 and filed for bankruptcy in 1996.  Remember “U Can’t Touch This.” Prophetic.

The champion may be Eike Batista, the Brazilian billionaire who went from $35 billion to $200 million in less than two years.  Leveraged stock and lack of diversity tend to do that when things go wrong.

The message is that wealth follows simple rules.  Spend less than you make.  Invest carefully.  Hire a tax advisor.  Have a mentor/advisor who can remind you about the dumb stuff.  Be wary of debt.  Be cautious acquiring assets that have ongoing upkeep.  Like the tigers.  Marry someone who shares your fiscal viewpoint.  Understand variability.

Avoiding dumb is a success trending move.  So is quitting bad decisions quickly.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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