Another source of confusion amongst the media and the general population is equating income with wealth. This includes politicians, who often espouse rhetoric that defines “rich” as a family who makes above a certain income level. As we have discussed previously, when you go to a job to earn income, you are simply trading your time and energy for currency. The currency can then be saved, invested, or spent. Wealth refers to the total accumulated assets held by a person or household at a single point in time.
The mindset that income represents wealth has distilled down to normal transactions that occur in our lives. When you purchase a house, a realtor asks “What is your price range”? A home lender then wants to know your income to determine what debt payment you can afford. Disturbingly, people often want to know the maximum debt payment for which they qualify. Instead, they should be asking what they require in a house, i.e. the number of bedrooms, stories, acreage, amenities, etc. This backward thought process has also consumed vehicle purchases. It was recently reported that about a third of auto loans taken out on new vehicles in the first half of 2019 were for terms of 6 years or longer! In other words, people have decided to stretch out loan terms to have a payment they can “afford” to create the illusion of being wealthy by virtue of a nice car. Basically, one will still be making payments on a rapidly depreciating asset while they are making necessary maintenance repairs well after the warranty expires. In short, peak insanity.
We have an entire generation of people that have grown up with this mindset, and worse, think that it is normal and acceptable. It is not. The foundation of building wealth has been and will continue to be living within your means. What I describe above is the antithesis of that. Some questions to ponder when shopping for your next house or car. In the case of a house, can you make a 30-50% down payment instead of the normal 20% or less? Have you considered that the total cost of homeownership is 30-40% more than just your mortgage payment and taxes? When buying a car, have you considering buying used rather than new? Can you pay cash for the entire purchase? If the answer to any of the above questions is no, you may want to reconsider.