Most rich-looking people are just folks with high salaries who spend a lot. Discover how the fake rich and your work colleagues could be hurting your wealth
Most of the people that you believe are rich are what the Texans call, “Big Hat, No Cattle.”
You say your boss earns $900,000 a year.
He drives a Maserati.
He has a house on the French Riviera.
He flies first class to London every month to see his free-spending friends.
Are you jealous?
Even a little bit?
He might be rich.
But if you forced me into a wager, I would bet that he wasn’t.
More likely, he’s among millions of the fake rich.
Big Hat. No Cattle.
This is far more common than you might think.
Here’s a 'rich person' acid test:
Without working, they should be able to earn twice as much as the average household income in the country they live in, indexed to inflation, for the rest of their lives.
For example, according to data compiled by averagesalarysurvey.com, the average individual salary in the UAE is about $84,100 USD per year.
Many households have two income earners, so assume the average household income in the UAE were about $120,000 USD per year.
I would consider a person rich if their household’s annual investment income could exceed $240,000 a year.
If they were to spend an annual inflation-adjusted 4 percent of an investment portfolio, they would need $6 million to generate that income.
Most rich-looking people are just folks with high salaries who spend a lot of money.
According to the late wealth researcher Thomas Stanley and his daughter, Sarah Stanley-Fallaw, most high-income people have low levels of wealth, relative to their income.
They might live in flashy neighborhoods, drive expensive cars, drink expensive wines, play polo on the weekend, own a vacation home in paradise, and wear eye-popping jewelry.
But if someone earns $5 million a year and they spend most of that, such a person isn’t rich.
They might even be poor.
Ironically, most wealthy people spend less than you might think.
That’s why, if you want to build wealth, it might be best to model the spending habits of those who are truly rich.
For example, wealth researchers Thomas Stanley and Sarah Stanley-Fallaw found that most wealthy Americans don’t buy expensive wines, expensive watches, live in multi-million dollar homes, or drive expensive cars.
Some rich people do, of course.
But most rich people don’t.
It might surprise you to learn that Fords and Toyotas are the most popular cars among wealthy people in the United States.
Among rich people, even Hyundais and Kias are preferred over Porsches, Mercedes-Benzes, and Teslas.
You can read about Thomas Stanley and his daughter’s research in The Next Millionaire Next Door.
Even the uber-rich often spend less than you might think.
As I referenced in Balance, nine of the seventeen world’s wealthiest people drive cars valued at less than $50,000.
I don’t mean to bash high-income people who live larger than they should.
But a pandemic of consumption affects us at every income level.
We establish spending “norms” based on what we see around us.
We might spend the same (or a little less) than our colleagues who earn similar pay.
That might send us a message that we’re doing just fine.
But that benchmark could be warped.
In today’s world of sophisticated consumer marketing and FOMO (a Fear Of Missing Out) our perceptions of “normal” consumption habits are increasingly unaware.
It reminds me of a story about three fish.
Two young fish swim towards an old fish.
The old fish asks, “How’s the water, boys?”
A few seconds later, one of the young fish turns to the other and asks, “What’s water?”
We need to see that metaphorical water in our personal lakes and rivers.
That means controlling FOMO so it doesn’t control us.
It helps to recognise that most big spenders (not to mention the people around us) don’t have as much money as we might think.
Most importantly, we should establish a personal financial plan that we can follow.
It should be based on best practices guided by economic science–and not what we see around us, or what the popular media prances onto screens.