Advertisement
savings

The Invisible Rich

The biggest barrier to becoming rich is living like you're rich before you are.

A while back I was leading a personal-finance seminar at a high school, and I posed this question to the teens: "When you see a man cruise by in his $65,000 BMW 550i, what do you assume about him?" The answer: "He's rich." And a man who drives by in a ten-year-old Chevy? "He's struggling."

Elusive realities. Just the answers I was looking for, and they provided a launching pad for a lively discussion of deceptive appearances and realities. By the end of it, these teens had a clearer sense of how little you can determine about wealth from a person's visible consumption. The BMW, I noted, is probably leased (perhaps for three years, no money down), so we can infer only that the driver earns enough to handle a $1,131 monthly lease payment. We know nothing about his net worth, which may be great ... or may be almost nonexistent.

Advertisement - Article continues below

And the man in the old Impala? Maybe he is struggling financially, but there's another possibility: His income is just as great as that of the dude in the Bimmer, but he's not saddled with a lease payment -- and he's investing the money in mutual funds that are growing at 10% a year.

Advertisement
Advertisement - Article continues below

The message in all this: The biggest barrier to becoming rich is living like you're rich before you are. Why? Because all that discretionary spending -- the chic apartment, frequent travel and restaurant meals, consumer electronics, fancy clothes and cars -- crowds out the saving that will enable you to be rich someday.

I often hear complaints from young adults, twentysomethings to those in their early thirties, that they'll never be able to buy a home because they can't afford the down payment. But when I probe them about their budgets, I find that they earn enough to make a down payment in just three or four years -- if they cut back on their spending, and if their starter-home expectations are reasonable.

Advertisement - Article continues below

Know who grasps this best in American society today? Recent immigrants, whether they're from Latin America, Africa, Asia or Eastern Europe. Many of them come to the U.S. almost penniless. They work long hours at modest wages and send some of those earnings to relatives back home. But, miraculously, they still have money left over each month because they live simply. Often they double up with friends and family in crowded housing.

What do they do with their savings? They buy a home, often in a less desirable neighborhood that other strivers are leaving behind. They fix it up, rent rooms to friends and relatives, and then trade up to a nicer home. They may keep their first and second homes as rental properties, becoming hands-on landlords.

Advertisement
Advertisement - Article continues below

A niece of mine sells new homes in the outer Virginia suburbs of Washington, D.C. The houses cost $500,000 -- a "middle market" price in this affluent area. Many of her buyers are Latinos. They don't look or act rich, and they often need translation help. Many of them arrived in the U.S. with nothing but ambition. They worked hard, started small businesses and saved 30% of their incomes.

Advertisement - Article continues below

Someday, when they finally feel as financially secure as they will actually be, they might start living it up. They might buy -- not lease -- a BMW, most likely a used model. High school kids will assume them to be rich and cast admiring glances at them and their fancy cars.

Proudly invisible

But just like overspending, the habit of frugality is hard to break. Maybe these folks will just keep the old Chevy. They will remain proud members of the Invisible Rich -- a growing army of super savers whose net worth is more impressive than their income. They'd rather live within their means, sleep well and forgo the covetous attention of their fellow citizens. Not a bad way to live at all.

Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine, The Kiplinger Letter and Kiplinger.com. This classic column was originally published in 2006 and is the kind of timeless financial wisdom we like to highlight again and again.

Advertisement
Advertisement

Most Popular

18 Things You Can't Return to Amazon
Smart Buying

18 Things You Can't Return to Amazon

Before tossing these items into your virtual shopping cart, be sure to read Amazon's return policy first.
September 17, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020

Recommended

Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020
A Step-by-Step Guide to Being an Estate Executor
retirement

A Step-by-Step Guide to Being an Estate Executor

Whether you’re planning ahead for your own heirs or have been asked to serve as an executor of an estate for someone else, it pays to understand what …
September 17, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
10 Things You'll Spend More on in Retirement
retirement

10 Things You'll Spend More on in Retirement

From reading materials to debt, the demands on your savings during your golden years might surprise you.
September 16, 2020