My wife and I are huge college sports fans.
The problem is, we’re not on the same team.
She’s a die-hard Michigan State fan, which makes sense since she got her undergrad degree there. I’m an Ohio State Buckeye, and although I didn’t attend that school, both my Uncles, Dad, and my first cousin, Jason, did. So their intense love for OSU sports became ingrained in me from an early age. Matchups between both schools have traditionally been pretty intense in our house. And both the boys are divided on their allegiance.
For several years we would stay at Jason’s house and then head in early Saturday morning to tailgate on football game day. They were such intense fans they bought an old school bus for the sole purpose of converting it to a Buckeye tailgating experience.
Jason was merciless to Kara when the Buckeyes won, which of course, I don’t condone any trash talk in competitive environments (wink wink). Poor thing. But she willingly entered the lion’s den, so that was on her.
In one of our visits, they had just purchased a huge, beautiful home in an expensive suburb of Columbus. It was right on a private golf course, and his wife had just given him the green light to join. On the Sunday following a Buckeye win, we headed over to their new lake home, to wakeboard on their new powerboat. We rode over in their new car, which we came to find out was Kirk Herbstreit’s car that he had just turned into at the dealership. Herbstreit is a very popular ESPN college football analyst with a taste for expensive cars. When we were departing Monday morning, they were packing up and heading to an expensive resort in the Caribbean.
At the time, these things they were buying made sense to me. Jason was a Controller at a corporation, and his wife was a successful pharmaceutical sales rep. I can’t imagine any scenario where they were earning less than $500,000 per year, combined. I would not be surprised if it were more than that.
Since then we have parted ways, but what did surprise me to hear very recently was that they were financially broke!
I am well aware as a wealth strategist that many high earners spend everything they make. I did, however, have a hard time believing with that high an income that they could possibly be in financial trouble.
The bottomline is that regardless of your income, if you continually buy liabilities and ignore the accumulation of assets, it catches up to you. What if they had stayed in their starter home, rented a lake house for a week or two, prepared and cooked at home, played the public golf course, and bought reliable used cars?
This is what we did while we were earning a multi-six figure income. It’s quite sustainable.
What if they took those savings and bought rental property, quality stocks, private businesses, crypto, and hired wealth coaches? The story ends quite differently now. They’d be multi-millionaires. Easily.
What might have gone wrong
Do you think when we were hanging out with them at their lakehouse, seeing their lifestyle, that we didn’t want that for ourselves?
We certainly did want to live like that, and we had the money to do it. But we wanted our things to buy us things. We wanted to stack up cash flow producing assets and use the income from those assets to pay for our expensive lifestyle. Now, the dream home mansion, the Tesla and Benz, the fancy restaurants, the luxury vacations we take are all funded by our assets.
Wealthy people take decidedly different actions than others.
We can chalk it up to luck, inheritance, specialized gifts like athletic or musical/acting talent, and release ourselves from taking personal responsibility in creating wealth. But the base line stays: We make quality decisions consciously, over and over again.
The vast majority of people who have built wealth didn’t do it with any of these means. They did it with a process that’s available to average people like you and me.
The most important thing to understand is what decisions, and therefore actions, they take when they earn money.
Please keep in mind that the difference between the 3 groups only has to do with finances and absolutely nothing to do with their value to society, as people, and value before God. No one is better than or worse than anyone else. This is merely to give you an understanding of how their day-to-day decisions impact their long-term financial health.
My personal belief is when we start to think that we are better than others because we have more money, that’s when we welcome the prelude to a personal crash. With that disclaimer clear, let’s take a look at what these 3 groups do on payday: The Poor, the Middle Class, and the Wealthy.
What the Poor, the Middle Class, and the Wealthy do on Payday
Payday can be any event where income flows into your life - whether it be from a W-2 job, a 1099 contract payment, a commission from a sale, profit from buying and selling a product, or income from an investment.
Also, let’s get this clear. I do not make the categories. The categories are where your habits, your behavior, and your mindset places you. You’re not doing certain things because you’re poor. You’re poor because you’re doing certain things.
They go and buy stuff. If it’s on sale then that means it’s a deal and they’ll need to buy it. They will typically spend everything they have before their next paycheck comes in, giving them no margin for error if anything should go wrong. When the tire goes flat and will cost $400 that they don’t have, this is incredibly bad luck that they can’t believe happened to them, instead of a minor life event that’s routine and typical and is expected.
Gambling is also big among them. Slot machines, lottery tickets, keno, these games with extreme odds stacked against them are their entertainment of choice. They are also very susceptible to predatory lending, paying huge amounts towards high interest loans, and giving out paycheck cash advances.
The Middle Class
The middle class on payday buy liabilities. We define a liability as “something that costs you money”. They may earn a very good income, but income doesn’t put you in the wealthy category. They buy the expensive car, get a bigger house, buy the boat, the snowmobile, the motorcycle, take the expensive vacation, remodel their basement or kitchen, join the country club, and rack up a monthly loan payment that eats up their entire paycheck as fast as it comes in. They’ll take out a HELOC and instead of buying an asset that just went on sale, they’ll tap it out for consumption then have another monthly loan payment. If they earn $10,000 per month, then they will have $10,000-$12,000 in monthly expenses. It doesn’t matter that much if they get a raise or increase their sales - they will always raise their spending to match their income.
They chase the rich lifestyle, the wrong way.
What the wealthy do on payday is the difference maker.
They buy income.
What I mean by buying income is they buy assets, which we define as “something that pays you”.
No, we aren’t talking about your personal residence, that doesn’t pay you unless you also rent it out and it creates positive cash flow. The wealthy reinvest their money back into their own businesses to increase revenue and the income they can expect in the future. They buy cash flowing real estate, dividend stocks, bonds, private businesses, structure private money loans, mortgage backed notes, RV parks, and alternatives like income producing cryptocurrency. It’s not that they don’t spend money and buy large homes, expensive cars, take amazing vacations or buy expensive toys. They definitely do these things and they very much want to enjoy their money. The difference is simply in the order in which they do it.
What about Me?
I, in fact, buy all of these things and actually very much enjoy spending money. However, I don’t enjoy spending the seed, I really only enjoy spending it when it’s the harvest. In other words, I want my capital put to work generating additional income, and THEN I’ll go out and get stupid.
When the Cleveland Indians played the Chicago Cubs in the World Series, I got a ticket behind 1st base for $4500. I took the rental income from my property portfolio to fund it. In 2018, I played in the World Series of Poker Main Event, a lifelong dream that started back in my college dorm room days playing for quarters with my friends. That entry fee is $10,000, and certainly, that’s a terrible bet as statistically, I had very little chance. I didn’t win; in fact, I got knocked out the first day, but I will always treasure the experience (and give it a few more tries!). When I turned 40, I threw a 2-night party with entertainment and an open bar with full apps, to the tune of $15,000. Our family takes at least 2 weekend ski trips each winter up north in Michigan to Boyne Mountain, after hotel, lift tickets, rentals, lessons for the boys, and resort food for a family of 4 for 3 days, we routinely drop $3-$4k.
And last year, I surprised my wife with a new 4-carat rock on our wedding anniversary. She has to put up with me and my bullshit so she definitely deserves the finest. All of these purchases certainly could be considered irresponsible and frivolous, but I do not regret any of them, because the income from my investments paid for all of them! And then that money will be replenished in short order.
It’s the order in which the wealthy do it.
When payday hits, I absolutely look forward to getting a dopamine hit (feel good chemical in your brain) from buying more assets. I’ve trained my brain to get a dopamine hit because I know that I’ll be able to get more and much better items, have more fun, take more trips, and have a much better lifestyle if I simply switch the timing of what I purchase. What I’ve personally seen happen is not a double increase - I’ve seen a triple, quadruple, and even greater compound effect where I can now consume exponentially more goods and services from simple decisions and disciplines on payday!
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