Tuesday, October 09, 2007

My Wealth Paradigm

In the beginning, I thought people who spent lots of money and owned expensive assets were wealthy. Therefore:
  1. Drivers of expensive cars were wealthy

  2. Owners of bigger houses or vacation homes were wealthy

  3. People who had expensive lifestyles (clothes, entertainment, vacations, etc.) were wealthy

Because of this belief, I sometimes considered buying things more than I could afford. One such instance was the purchase of my first car. Since I had graduated as a Chemical Engineer, I had a well paying first job. A number of my peers were driving new cars, and some were driving BMWs and Audis. On the other hand, I was driving the 13 year old family car that my parents gave to me when I started my job. After two years, I decided to buy a new car.

The choice came down to a American sports sedan and a BMW. I liked both cars. The BMW had more wealth appeal, but was 50% more expensive. I did the calculations on the cost. While would make me appear more wealthy, I would actual be less wealthy. The loan payments were higher and maintenance cost was higher. Once I did the calculations, I couldn't justify the additional cost. So I bought the American sports sedan, which I eventually drove for 13 years.

Over time, I learned that the appearance of wealth does not necessary mean one is wealthy. Therefore, I have modified my wealth paradigm. I now believe:
  1. Wealthy people spend less than they earn. Therefore, they have significant amounts of money in the bank, stocks or bonds.

  2. Wealthy people use debt sparingly and prudently. They do not use debt to support their life style.

  3. Wealthy people place priority on acquiring assets that can generate revenue and profits (e.g. non-home real estate or business). Therefore, their assets grow in value, instead of depreciate.
This paradigm shift has been an important one for me. It has helped keep me focused in our journey to early retirement.

For more on Ideas You Can Use , check back every Tuesday for a new segment.

Photo Credit: morgueFile.com, Michael Shur

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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