Now Is The Time To Make Life Changing Adjustments
Posted on August 13, 2008
Many people are learning a painful lesson about the difference between having “things” and having wealth. You can have enough “things” to go broke! When the economy is booming, money is easy to earn and credit is flowing freely, the urge to buy more “things” can be very enticing. However, just because you can buy a bigger house, a new car, a boat, motorcycle or the latest electronic gadgets, doesn’t mean you can afford to own them. With each new purchase comes additional cost of ownership; expenses like taxes, licenses, maintenance, utilities, etc. Believe it or not, even if you own “things” free and clear, it’s possible to acquire enough of them that the cost of ownership exceeds your earnings.This is a lesson many first-time home buyers have learned during the past couple of years. In 2004-2005, when interest rates were at historic lows and credit was easy to obtain, many lifelong renters bought their first homes. Few of them realized that home ownership involves much more than just making the mortgage payments.
When renters pay their rent, the only additional expenses they may face are utilities and these are often included in the rent. While they may be able to make the rent payment comfortably, when faced with taxes, insurance, maintenance and upkeep costs, many find themselves coming up short. As renters, they never had to worry about the cost of replacing a failed furnace, heat pump or a hot water heater. They didn’t have to save to replace the roof shingles, carpet or repaint the house. These costs were all born by the landlord, which is one reason why rents are usually higher than mortgage payments.
Cars, boats, planes, resort properties and other “things,” all come with additional cost of ownership. The secret to increasing your standard of living without running the risk of your new assets putting you in the poor house is to acquire them with income from passive investments. The order of events for a successful life is work, earn, invest then buy. You must first work to earn money, then invest part of the money and be willing to wait until the earnings from your investments are adequate to cover the cost of ownership of the “things” that improve your level of comfort.
One of the biggest problems in today’s society is getting these events out of order. Too many people work, earn money and then spend the money on “things.” Because of this, they never seem to have enough to invest and as a result, they never enjoy the security that comes from having an income stream for which they don’t have to work. Buying “things” without investments to cover the cost of ownership nearly always results in having to work harder and harder to make ends meet and then ultimately having to reduce your lifestyle in retirement when earnings drop. It’s known as living paycheck-to-paycheck or as some would say, “Living on a treadmill.”
There’s a big difference between earning a living and building wealth. Some people earn enormous incomes, but never build wealth, yet a number of modest wage earners are able to build substantial wealth. Building wealth takes patience. You can’t live an “I want it now” lifestyle and expect to become wealthy. As a nation, Americans have forgotten, or never learned, the value of patience. All one has to do is look at the way government operates to understand this phenomenon.
The United States has a massive amount of public infrastructure. To appease the public, for years elected officials have continued to build buildings, parks, roads, airports and other public facilities that all have a cost to maintain. They create agencies to oversee and protect nearly every aspect of our lives. These public facilities and agencies are designed to improve our standard of living, but the problem is the cost of keeping it all functioning is devouring a greater and greater portion of the nation’s wealth and running up the national debt.
Whether it’s an individual or the country as a whole, when your standard of living increases beyond what you can comfortably support, it is a recipe for disaster. Many of the economic problems we are currently experiencing are the direct result of a nation bloated with excesses and unwilling to adjust its standard of living to what it could afford. Call it karma, chance, fate, destiny or any other term you want, but when common sense is replaced with greed and self-indulgence, market conditions will eventually seek balance and force a correction. That’s what we are now experiencing.
Here’s a tip! If your ox is in a ditch, you won’t get it out by whining and complaining. The same holds true if your finances are underwater and you feel like you are about to drown. The only way to improve either situation is to change what you’re doing. The start of a new year is a great time to pause and carefully analyze spending in relation to income. If you borrowed money the previous year to support your lifestyle, continuing that same lifestyle another year will more than likely to put you deeper in debt. The only way to correct the problem is to earn more or spend less. Try living one year on 90 percent of your income and investing the other 10 percent. At the end of that year, you will feel much better because your debt will be smaller and you will have some money in the bank. Remember the recipe for success; work, earn, invest then buy.
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I absolutely am in agreement. You can only be successful if you live below your means not above. Investing in real state is the only avenue. .