Will and Cathy were the envy of the neighborhood. Their home was the largest on the block and had a swimming pool in the back yard, complete with hot tub. They each drove new luxury imported vehicles, Will an SUV and Cathy a sedan, and replaced them every three or four years. Every winter they went on a two week all-inclusive vacation and always flew first class. Will and Cathy prided themselves on always wearing the latest fashions and their two children were always dressed very fashionable as well.
Everyone thought that Will and Cathy were wealthy. They mistakenly thought so themselves. Nothing could be further from the truth.
A lavish lifestyle is rarely indicative of true wealth – usually it’s just a show of good cash flow that’s being consumed. Let’s take a look at some of this “show” of wealth:
Large home with swimming pool – Will and Cathy really did live in their “dream” home. However, in order for them to get into it, they got the biggest mortgage they could get based on the purchase price in an unusually low interest rate environment. A pool is an expensive luxury, to install and to maintain, and in most areas of Canada actually takes away from the future re-sale value. The home consumes a lot of their earned income every month.
Luxury foreign vehicles – Wonderful to drive, but expensive to maintain. Plus they depreciate in value just as quickly as a domestic vehicle. Contrary to what the salesperson said, they don’t really “hold their value” over time.
Exotic vacations – Very enjoyable, but they are nothing but a consumption of income.
Expensive clothes – Great to wear, look at and be seen in, but again, a big consumption of earnings.
We all have basic needs – food, clothing and shelter. Anything above the basics is simply lifestyle. Lifestyle does NOT EQUATE to wealth; it is simply a show of consumption. This is not to say that we shouldn’t have a nice lifestyle, but don’t sacrifice the accumulation of wealth for the so called “good life.”
There are only two things that can generate an income – a person at work or money at work. All too often, it is falsely believed that the earned income will always be there, and a lifestyle is lived based on that income or even beyond it.
Will and Cathy eventually realized that they really weren’t accumulating any real wealth. They started asking themselves a very important question before allocating any of their
money beyond their basic living needs – will it or won’t it contribute to our wealth?
The truly wealthy tend to avoid the instant gratification so prevalent today. It makes more sense for them to wait until they have built up an income producing asset to the point where its cash flow covers the cost of the lifestyle expense. – M Dumond