Principles of Wealth #7*

To acquire wealth, it is helpful to know what it is… and what it is not. 

There are many sorts of wealth. This essay is about only one of them: financial wealth.

Financial wealth can easily be defined as net worth – the sum of one’s assets less the sum of one’s liabilities.

You’d think a concept so simple and straightforward would be easy to understand. But surprisingly few people do.

Years ago, at an investment conference, I asked the audience to volunteer definitions of financial wealth. About a half-dozen were proffered, none of which was net worth. The two most popular were having a lot of valuable things and making a lot of money.

Neither one is true.

I bought a Richard Mille watch years ago in Paris.  It was new to the market then, and I was in some kind of spendthrift mood. I bought it on impulse for $35,000.

A few years later, it stopped working. Getting it fixed cost me another several thousand dollars. A few years ago, it broke down again. That brought my total investment in the watch up to nearly 40 grand.

It’s a handsome watch, but it’s not any better looking than several other watches I’ve bought for a fraction of the price. And in terms of keeping time and reliability, it doesn’t compare to a digital Casio I could have bought at the time for $35.

I should be ashamed of myself for buying it in the first place. From a financial perspective, it was foolish. But I didn’t buy it to keep time. I bought it to give me a dose of serotonin – i.e., the thrill of spending money foolishly. And the purchase delivered that.

Since then, several people have complimented me on the watch. Those moments felt pretty good, too. And somehow, the combination of that first thrill and those half-dozen compliments feels like a fair deal to me.

On an ego-gratification basis, I feel like I got what I paid for. But from a net-worth perspective, I would have been better off buying a Casio and investing the rest in real estate.

When we acquire things for emotional reasons, we almost always pay more than they are intrinsically worth. And when we exchange our cash for status symbols, we generally make ourselves poorer in terms of net worth.

Acquiring status symbols is a bad way to build wealth. And having lots of expensive things is not a valid indication of wealth.

That kid driving the red Ferrari? The doctor with the ocean-front mansion? The woman wearing the Oscar de la Renta gown? The look says, “I’m wealthy.” But you can’t know that. The kid in the Ferrari might be making $40,000 a year. The lady in the gown could be in the middle of an expensive divorce. The doctor in the mansion might be worth less than nothing.

No, you can’t measure wealth by the things people have.

What making a huge income?

What about your idiot college friend that is “pulling down 200 Gs a year” selling life insurance? Or that jerk you met in law school that charges $700 an hour for his services?

Alas, that is no indication of wealth either. Earning a big income is certainly a very solid step in the right direction, but it is useful only if a good percentage of that income is saved.

What commonly happens when our income increases is that we reward ourselves by increasing our spending, too. The temptation to do this is almost impossible to resist for most people. And the serotonin hit we get from spending more becomes addictive. Before we know it, our spending has matched or exceeded all that extra income.

Once again, we end up poorer, not richer, despite the appearance – and even the feeling – of gaining wealth.

We cannot escape the simple truth of personal economics: Wealth is net worth, and net worth can only be grown by making more than we spend.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. 

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