The accumulation of wealth, and what people perceive as being wealthy, has fascinated me over the decades. Below I have provided you with 2 very stereotypical examples and as you read each one, I would like you to pick which person is the wealthier?
So lets start….
Jackson lives in a nice home in a suburb which is about 20km from the city. He drives a european luxury car, and works in a management type role earning an income which is in excess of $100k per year. Each year he takes regular holidays, and at least once a year travels overseas for a nice break.
Jackson is always well dressed and enjoys going out on the weekend socialising with friends, family and doing activities, There is never enough hours in the day for Jackson but in a quiet moment, he ponders about his financial position, and how it might track in the future, and whether it will be enough for retirement?
On the other side of town, Matthew lives in a modest home in an outer suburb i.e. outside the 20km bracket from the city. He drives a locally made car, and works in a role which earns under $100k per year.
He tries to take a break at least once or twice a year with normally one being over Christmas. Most of his breaks are local, with an occasional trip overseas every couple of years.
His weekends are normally busy catching up with friends and family but generally does not spend a lot at these outings. He is not too fussed about the latest fashions, but is always neatly dressed and presents well when he meets new people.
Over the Christmas break, Matthew took time to reflect on the year that had been, and in a quiet moment, considered his financial position and what it might be like come retirement?
Of these two examples, if you had to pick one, which one would you say is wealthier?
To assist you, here are a couple interesting insights which I have found over the time:
1. Income is not necessary the sole determinant of wealth.
We meet people regularly who haven’t earned large sums, but with a strong robust investment strategy and a well thought out retirement plan, have subsequently built up a large amount of capital over time. It is just being smart with what you have and putting it to work.
The other element is living costs. Sometimes a person who has a higher income also spends a lot more. This places enormous pressure on the amount of capital which they might need in retirement. Therefore, when reviewing one’s income, it is important to note that your capital base is actually linked more to your spending level than what you earn.
2. Nice cars and houses don’t necessarily indicate that you are wealthy.
Whilst fancy cars and houses are normally associated with wealth, but it isn’t necessarily the case. These days you can easily lease or finance a car, or rent a nice house thus not really owning these assets. Advertisers and marketing people have done a wonderful job trying to confuse society on this very point.
We regard assets as having ownership or control in something that appreciates in value, or generates an income.
When people think about wealth creation or retirement planning, they often think…. “If only I had an extra amount of income I could ….<fill in the gap>”
The reality is however both scenarios have the same chance to have a wonderful retirement and the ability to build wealth. It is just a case of having a thoughtfully developed strategy rather than an rudderless approach to your financial position and what this position might look like tomorrow.
Like all great Financial Planning ideas, it is important to seek professional guidance and we would of course recommend the team at AJ Financial Planning.