Generating more income (active and passive) is the best way to build wealth, if you don’t spend it as fast as you make it. But most people don’t do this. As their income rises, so too does their spending. Some actually spend more than the extra money they make. Why? Because having extra things, like a bigger house, a newer car and assorted luxury toys is what we’ve all been told wealth is about. This is a fact: the average American has more than $100,000 in total debt and less than $1,000 in savings.
There are several lessons to be learnt from this:
1. There is a natural tendency to spend more when you make more. If you want to become wealthy, you must be alert to this tendency in yourself and resist it.
2. It is also natural to want to reward yourself for earning more money, but how much you spend on that reward is unrelated to the psychological benefit it gives you.
3. here is no relationship whatsoever between the price of toys and how much you pay for them. A $300 watch can look as good and work as well as one that costs $3,000 or $30,000.
4. Speculative investing is a type of gambling. The guy who sells it to you will call it an investment, but don’t fool yourself. If you don’t understand the deal from the inside out, chances are you will lose 100% of your money.
5. Wealth acquisition has everything to do with increasing your net investable income and saving an increasingly larger percentage of it. When you boost your income, give yourself a reward. Buy or do something fun. But don’t spend more than a small fraction of that extra income. The rest you should put into savings.
Here are some bad examples:
Mike Tyson – earned more than $400 million during his boxing career. But despite this, he managed to end up tens of millions of dollars in debt. He spent his money on $2 million bathtubs, $3.4 million worth of clothes and jewellery, and two Bengal tigers that cost more than $10,000 per month just to feed, train and insure. Tyson also made some bad investments and ran up a multimillion-dollar IRS debt.
Vince Young – his Tennessee Titans rookie contract was $26 million. He wasted crazy money, but one spent just explains his mindset: $22,000 for a Southwest Airlines flight from Houston to Nashville. $22,000 for one simple flight? He bought every seat on the plane because he wanted some “alone time”.
Latrell Sprewell – NBA basketball player was offered a $21 million contract extension by the Minnesota Timberwolves. He said he was offended by the low offer. He mentioned that he had “a family to feed.” The Wolves countered with another offer: 0 !!!
Curt Schilling – long-time pitcher for the Boston Red Sox, “invested” all ($50 million!!!) into one video gaming company called 38 Studios. It wanted to compete with EA Sports and Activision. His total return: 0.
Terrell Owens – has made about $80 million playing for the NFL, but today, according to reports, he is broke. Much of his income went to the “usual” things like mansions, luxury cars, big champagne bills but a good deal of it went into “investment”. E.g. $2 million on a bingo hall, which violated NFL gambling policies and returned him: 0.
These are not isolated examples. In fact, according to Wyatt Investment Research, an astonishing 78% of NFL players and 60% of NBA players file for bankruptcy within their first 5 years of retirement.