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The Phony Rich
| July 9, 2010 | Posted by Roshawn Watson under Uncategorized |
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| Image Credit: Edo Peltier |
By: Roshawn Watson
Oh the glitter! The exotic cars, the homes, the private planes, chauffeurs, the celebrity hot spots, and nightly $300-plus per person dinners, etc. all encompass our vision of wealth. Advertisers will spend a fortune marketing this image of the wealthy to us because this is what will get us to part with our hard earned dollars. After all, money is the most easily renewable resource, right? Surely, we’re smart enough to out earn stupidity (or at least our irresponsibility). If this is your perspective or if this lifestyle is your aspiration, then there is a secret that you should know. Occasionally, the people living these high consumption lifestyles make or have so much money that they are living WAY BELOW their means. In other words, given their high level of wealth and cash flow, they’re actually frugal by their standards because such luxuries are a small part of their world. However, all too often, these big spenders are playing another game entirely. They look rich but are really financial frauds, and this is their story.
You Can’t Have Both
I recall an instance where two of my friends were discussing their VERY fancy cars. Both were high income earners, but I remember thinking these two people are as different as night and day financially. One was conscientious and had been frugal for most of her life. She bought her dream car and could genuinely afford to pay for the car outright. The other friend was broke. He had over $100,000 in credit card debt and a house payment he couldn’t afford. Although they both looked prosperous, the broke friend looked and dressed the best with his designer clothes! I guess his philosophy is to fake it until he makes it. However, he never did make it.
Assuming that the median household income in the US is approximately $50,000, most households will bring in approximately $2 million over a working lifetime (not including taxes nor adjusted for inflation). What will you have to show for it? My wife and I sometimes watch a show on HGTV called Property Virgins, about the perils and triumphs of first-time home buyers. Because first-time buyers typically don’t have much money, the host/realtor Sandra almost always has to rein in their expectations. She often makes them decide whether to compromise on the size and amenities of the home or their desired location because almost certainly they can’t afford both. Similarly, I think you should ask yourselves will you fill your home with fine clothes and the latest gadgets, or will you fill your portfolio with income-producing assets? Sometimes it is important to pose the question in that manner because most people simply can’t afford to do both simultaneously.
Some people even go broke trying to look rich. That’s right, several people so desperately want to appear prosperous, that they bankrupt themselves playing the part. Teresa Giudice and her husband’s recent filing of bankruptcy is just one of the latest examples of this unfortunate pattern. She is on the Bravo hit reality television show The Real Housewives of New Jersey as a bling-flashing, wealthy socialite.
She’s also nearly $11 million in debt and has an annual household income of $79,000 (CBS news).
Whoa, that’s a far cry from great wealth. Yet on television she is seen living in a $1.7 million mansion, furnishing her living room with gold furniture, and lavishing her daughters with shopping sprees and parties. I’m certainly not making fun of her financial difficulty; I merely bring it up because she is in the public eye portraying and selling the image of wealth, and I am dubious why it took bankruptcy to get them to drop the facade.
Apparently, Teresa isn’t the only one playing a rich person on TV. Believe it or not, all five of the Real Housewives of New Jersey have recently had financial challenges. The point it what makes for good reality TV doesn’t equate to their financial reality.
Play Some Defense
Even high earning movie stars and producers aren’t immune from their financial decisions. Nicholas Cage’s recent financial troubles are also well documented. Consider that this is someone who has generated tens of millions within a calender year. For example, in 2004 he reported his taxable income as $17 million from the movie National Treasure according to Forbes. Most people will never earn $17 million in their entire lifetime, let alone in a single year. In fact, only 3% every make more than $200,000 or more per year. Thus, if you will never become rich playing phenomenal offense (i.e. creating a ridiculously high income as a celebrity, winning the lottery, or inheriting from a wealthy aunt), then the best way for you to achieve wealth is by playing some awesome defense (good money management skills, frugality, and consistent investing). You don’t have to take my word for it.
According to the 400 richest Americans (Forbes 400), 75% believe “the best way to build wealth is to become and stay debt-free.”
For typical millionaires (not the Phony Rich who generally are not millionaires or are gross under accumulators of wealth), there is little to no pretense. They often go unrecognized because they don’t care what others think enough to dress or act the part. They value financial security over displays of status. They would rather focus on their balance sheets, income statements and financial ratios. For example, most millionaires’ wealth dwarfs the wealth of their neighbors. Excluding those who live in California, the wealth of most millionaires rank in the top 5 percent of their neighborhoods. This means they can afford to move way up in house but choose not to. Most millionaires live in moderately priced homes (less than $400,000) located in unimpressive neighborhoods. This is one of the ways millionaires avoid becoming house poor, and it is not difficult to avoid emulating high-consumption habits if you don’t live anywhere near high spenders. In contrast, two thirds of high earners/high consumers own or occupy homes valued over $1 million. Of course it’s okay to live in an expensive home after becoming a millionaire, but most people won’t wait that long. Thus, most homes valued at over $1 million or more are not occupied by millionaires.
The Phony Rich are among us. If we are not careful, we will find ourselves emulating them. Never has it been easier for us to pretend to be rich rather than actually become rich. If you choose to assess the wealth of others, the real question is not what conspicuous displays of status they have (i.e. the obligatory BMW) but rather what income-producing assets do they have? In Texas, they call the scenario where someone looks wealthy but doesn’t have any tangible wealth: Big Hat, No Cattle. Perhaps, Oprah said it even better. You can have it all but you can’t have it all at once! Thus, I pose the question to you. Do you want the big hat (bling and doodads), or do you want the cattle (real wealth)? It is unlikely you can have both simultaneously.
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Excellent post. Dr Thomas Stanley wrote about this in his book "Stop acting rich" which I reviewed some time back at http://www.joetaxpayer.com/stop-acting-rich/
He observes that there's income rich, where people are making a great income but burn right through it trying to look the part, but then there's balance sheet rich, where you have wealth appropriate for your age and income.
The 50 year old earning $100K but with $1M in retirement accounts is doing far better than the one earning $250K, but with nothing saved. The latter guy is in for a rude awakening.
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Hey Joe,
That's definitely the point. The true mark of financial intelligence is not how much you make but how much you think (Thomas Stanley). I couldn't agree more with your interpretation of that example. The BA (balance sheet affluent) is certainly better off than the IA (income affluent), regardless of their incomes. High income is always welcomed; however, you must mind your investment portfolio if you truly want to be wealthy. I'm definitely enjoying reading "stop acting rich." Regards,
Shawn
"She's also nearly $11 million in debt and has an annual household income of $79,000 (CBS news). " <–Really??? Wowwa! That's aLOT of hunkin' debt. And that is crazy, too!
I would love to have the glitz and glamour; the multi-million dollar mansion. Who doesn't? It's such a high level of wanna be when you see all the actors/musician's 'living the life'. But if it comes with the unseen background of the quote above…No Thank You!
Great post, Watson!
And Joe, Thank you for reminding me to download Stop Acting Rich. Need to do so after I finish with Warren Buffet's Snowball. š
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Hey Christine,
One quote that comes to mind is "all that shines is not gold." The sad reality is that only about 80,000 people (per Thomas Stanley) qualify to live this way and still be alright financially. For example, he says a minimal requirement is that you have a net worth of at least $20 MILLION DOLLARS. Given that most (2/3 of) millionaires have a net worth of less than $2.5 million, a small fraction of millionaires even qualify for this ridiculous life of excess. The rest are just financial fakes or irresponsible. Either way, not my financial role model.
I don't have any problem with nice things just like you. I think it is all about your ratios though. How much of your financial world is tied into luxuries is the key question (as best as I can tell)?
Wow, I am SO impressed the woman can borrow $11 million bucks with an annual earning of just $79,000 a year!
Any idea how she did that? B/c borrowing 120X your annual income is pure GENIUS!!!! Why not if you can get away with it, and then declare bankruptcy right?
Best,
Sam
My recent post Even Lebron Doesn’t Listen To President Obama
Hey Sam,
To be fair, she said her husband had several real estate ventures that lost money during the economic downfall, which resulted in their income dropping. They didn't report what their previous income was; also, I don't know what kind of real estate he was involved in (i.e. it's easy to go bankrupt if you are a developer). However, I don't consider it inaccurate to say they were subsidizing their lifestyle with a whole lot of debt. The gold furniture tells the story!
That stat blew me away – $11m vs. $80k…guessing they had substantially more income prior to the decline (as you note).
Individual wealth is far less impressive than generational wealth (just finished reading an article over at Monevator). It's sad to think the disappointments she's setting her girls up for.
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@FinEngr – I agree that building an empire that can stand the test of time is laudable versus frivolous spending. The problem isn't the fun per se but rather priorities. For example, people will take their families on cruises but neglect to properly fund their retirement and the college fund for their children. That's irresponsible, no? I feel sorry for her children because that lifestyle is all they know. Hopefully, they do very well (or marry well); however, if they don't, they may still feel entitled to such lavishness. Disappointments indeed.
Really interesting article. I feel sorry for people that are so insecure that they live above their means to fit in or elevate their social status.
P.S. What is it with the gold furniture in the Northeast? I think Donald Trump has the ugliest furniture!
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That's right, this "presumed elevation" in social status is really meaningless anyway. While no one is saying go out of your way to look bad, who cares if the parking lot attendant thinks you are wealthy or broke. Even if your friends think you are too frugal, that's certainly your right. Sometimes I wonder if people who spend above their means to impress others are stuck in high school: I have to look good otherwise the "cool kids" won't play with me, not realizing that being broke is not cool!
I have no idea about the gold furniture. It's gaudy IMHO.
I know! I was totally questioning how they accrued that much debt on such a salary, too. Real Estate was the first thing that came to mind. Mind Blowing. I would hate to need to deal with that kind of debt!
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One thing that may be working in their favor is that once you have made a high income (i.e. one over six figures), there appears to be a strong likelihood that you will be able to achieve that type of income again. If this is their situation, then who knows what next year holds for them.
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