The Best Financial Advice I Ever Received

In my post about the world’s ugliest sofa contest, I got a few comments asking why I didn’t just buy a new sofa instead of entering a contest to win one. After all, the cost of a new sofa wouldn’t make much of a dent in the blog’s income.

To answer that question I need to share with you the best piece of financial advice I ever got.

It’s Not What You Make, It’s What You Keep

It really doesn’t matter how much money you make. What matter is how much you get to keep at the end of the day. There are tons of people who make a lot of money and spend every cent they make and more. They drive all the fancy cars, go to the fancy clubs and live a “millionaire’s lifestyle”, only they’re not millionaires. In Miami, they’re known as $30,000 millionaires. They make $30K a year but live like they make a million.

Thanks to low-cost leasing and zero down financing, anyone with even a modest income can project the image of a millionaire. The only problem is, the debt will eventually catch up to them and that’s when it’ll all come crashing down. This was what caused the US financial meltdown. Too many people were spending more than they make and leveraging their debts to the hilt.

The funny thing is, that millionaire’s lifestyle they’re trying to project is false. Most millionaires don’t drive fancy cars or live in upper class gated communities. They’re more likely to live in a middle class neighborhood and drive a domestic sedan. Since the average millionaire’s lifestyle is modest, they get to keep a lot more of what they make and that’s the key to real wealth.

By investing most of my blog income into various investments instead of using it to buy a new sofa, my investment income is starting to approach my blog income. Best of all, investment income is 100% passive and I love passive income. My goal is to have my investments become the biggest income source and to do that requires that I dump huge amounts of cash into it every month. Therefore, you’ll see me enter a contest to win a sofa before spending the money to buy one.

You Can Be Broke At Any Level

Just because someone makes a lot of money doesn’t mean he’s rich. There are tons of broke “rich” people. I’m not shock one bit that four out of the six Real Housewives of Orange County had their houses foreclosed on. They were all trying to live lifestyles that were well beyond their means and the gated community they lived in encourages this “keeping up with the Jones” mentality.

Most people who live in gated communities are not millionaires. The house is mortgaged to the max and the cars are all leased. They have no real assets and can’t do any investing because they spend every dollar they make buying depreciating toys to keep up with the couple next door who is trying to keep up with them. If the economy takes a downturn or something happens to their jobs, they’re toasted. And guess what? That’s exactly what happened.

After the massive bank bailout, the New York Times ran an article on how it was impossible for bankers to live on only $500,000 per year. This was the amount President Obama set as the top pay for banking executives whose firms accept government bailout money. Some of the costs of being a top-level New York banker include:

  • Private school: $32,000 a year per student
  • Mortgage: $96,000 a year
  • Co-op maintenance fee: $96,000 a year.
  • Nanny: $45,000 a year.
  • Taxes: $207,000

We’re already over $500K (assuming two kids in private school) and we haven’t included the other essentials like the summer home, car and driver, club memberships, personal trainer, personal assistant, wife’s clothing allowance (that’s going to cost!), dining out and food. Don’t be too impressed by someone just because he makes a lot of money. You can be broke at any level.

My advice: Don’t try to live the millionaire’s lifestyle. Live the Dot Com Lifestyle instead.

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