The Joneses Are Making You Poor

I’ve taken up the habit of listening to audio books during my commutes and morning walks with my dog. It’s been a great way for me to be productive and continue to learn outside of my full time job. If you’re looking for an easy way to learn more, I highly recommend audio books.

Anyway, I’ve been focusing on personal finance books and one of the major themes is that getting rich isn’t about how much you make. It’s about how much you save. Or, put another way, how little you spend.

Real Life Millionaires

If you had the money, why wouldn’t you want to spend it on cars, homes, and anything else your heart desired?

In The Millionaire Next Door by Thomas J. Stanley and William D. Danko, they discovered that millionaires actually often look just like you and me from the outside. They live in middle class neighborhoods and drive boring sedans. Your next door neighbor could very well be a millionaire.

You might be thinking that’s impossible. Your next door neighbor Nancy Yu drives a ten year old Toyota Camry, has a modest house, and sends her kids to public school. There’s no way she’s a millionaire. She’s just a regular person like you.

On the other hand, you’re thinking your friend Fred Jones is the rich one. His family lives in a mansion in a neighborhood akin to Beverly Hills. He gets a new car almost every year, has all the latest phones and gadgets, and has that millionaire lifestyle. You wish you could live the life that Fred has.

But the data shows that you’ve likely got it backwards.

First, let’s agree on what we mean by millionaire. A millionaire is someone who has a net worth of one millionaire dollars or more. Your net worth is the value of all the things you own minus all your debts. We’ll take a closer look at your neighbors Fred and Nancy.

The Joneses

Fred has a pretty high-paying job. He worked hard throughout his career and now makes $100,000 per year. After paying for taxes and deductions, he makes about $6,600 per month. With that sort of income, he makes more than 87% of Americans! You’d think he’s pretty well-off. Indeed, if you look at his lifestyle, he seems pretty well-off. His house is worth $500,000 and he drives a Porsche worth more than the house you grew up in.

Fred purchased his house last year. Before that, he was renting an upscale condo. He put together a $50,000 down payment so he had to take a $450,000 loan out at 4.5%. His monthly payments come out to be about $2,300. But on top of his regular payment, he pays annual taxes, maintenance, and insurance. That all comes out to about another $1,000 per month.

As you’ve gotten to know Fred, you’ve found that he’s a car guy. He loves new cars. Because of this, he leases his cars for a year or two and then moves on to the newest model once his lease is up. His current lease is on a Porsche 911 Carrera 4. It can go 0–60 in 4.3 seconds, has an all-leather interior, and features the latest in technological integration. The car’s MSRP is nearly $100,000 but he tells you he got a great deal on the lease which is only $1,500 per month.

The last of Fred’s major expenses is his credit card bills. He puts nearly everything on his credit cards. He always boasts about the great deals his credit card company gives him and the various rewards he’s earning. After paying for his house and car, he has about $1,800 left over to put towards his credit card bills. It doesn’t cover his entire debt, but he more than covers the minimum payment.

The average American has about $6,000 in credit card debt. Fred is making a lot more than the average American and is thus spending more as well. If his credit card debt was proportional to the average American’s he would have right around $16,000 in credit card debt. But as you know, Fred loves his toys so his debt is closer to $25,000.

Fred can easily cover his expenses and he also has some money saved up. He has been able to save $50,000 over the years. All in all, Fred thinks he’s doing pretty well for himself.

But if we look at Fred’s net worth, he’s actually not doing too well. Since he just purchased his house, he still owes $445,000 on his loan. If he were to sell right now, he’d only net about $40,000 after paying closing costs. On top of that, he has his $25,000 in credit card debt. All in all, Fred’s net worth is a measly $15,000. If he were to lose his income, Fred would likely have to file for bankruptcy soon afterwards.

Neighbor Nancy

Now it’s time to take a look at the life of your neighbor Nancy. You’re surprised to find that Nancy does pretty well for herself. Nancy and her partner make $80,000 per year to support their family of four. It’s not quite as much as Fred and his family but still a sizable income. Nancy has about $5,300 per month after taxes and deductions.

Nancy lived in the neighborhood before you did. You know that her house was the first and only house she ever bought. She knew that over the long term, owning a house is cheaper than renting. She bought it for $150,000. She took out a 15-year loan and paid it off a few years ago. Based on the current market, her house is worth about $225,000 now. Her only housing costs are utilities, insurance, and taxes which come out to about $300 per month.

Nancy doesn’t have any car payments. Again, she’s been driving the same car for as long as you’ve known her. She says she doesn’t need a new car. Her current car works fine and each time you bring it up, she says she “plans on driving it into the ground” with a chuckle.

Regarding credit card debt, Nancy doesn’t have any. She does have a credit card. She thinks it’s convenient that she doesn’t have to carry cash or change and the occasional rewards are nice. But she always makes sure to pay off the full amount each month. She knows the difference between good debt and bad debt. She doesn’t believe in buying anything you can’t pay cash for. Her monthly credit card bill usually amounts to around $2,000 which includes groceries, gas, and discretionary spending.

With her monthly expenses at $2,300, Nancy puts the $3,000 extra she earns each month into her investment accounts. She doesn’t feel the need to buy trinkets or toys. She would rather put money away for her future self when she retires.

Nancy has been putting money into her retirement accounts since she started working. Not only that, but she invested her money so that it continued to grow over the years thanks to the power of compound growth. Her retirement accounts are worth nearly $800,000.

If we put it all together, Nancy’s lack of debt, $800,000 retirement accounts, $225,000 house that she owns, and car valued at $3,000 put her net worth at $1,028,000.

The Joneses or Yu?

So Fred Jones may look like a millionaire, but Nancy Yu is a millionaire.

You may have heard the phrase “we buy things we don’t need with money we don’t have to impress people we don’t like” (not a real quote from fight club). That’s what Fred is doing. Much of his income is already promised to other people because of his need to show off to others. Between his mortgage, lease, and credit card bills, he doesn’t have much left over at the end of the month. He may be able to cover the minimum amount on his credit card bill, but he spends more than he pays off each month. He may live in a half a million dollar house, but his financial situation is a house of cards.

Nancy, on the other hand, used her income to save and invest for her future self. With careful spending, she could probably retire from her job today. She knows she has the funds to live a more lavish lifestyle, but that would mean putting her in a more precarious financial situation. Instead of the material possessions, she prefers to have the financial peace of mind.

Real millionaires don’t subscribe to a consumption lifestyle. Instead they choose to live a life of financial security. It doesn’t mean living like a monk. But it does mean using money for things that make you happy and being mindful of how you spend your money. So what will it be? Will you try to keep up with the Joneses or will you be a millionaire?