My Point of View
The Invisible Rich
The biggest barrier to becoming rich is living like you're rich before you are.
By Knight Kiplinger, Editor in Chief, Kiplinger publications
October 2006
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Editor's note: This classic Knight Kiplinger column was originally published in October 2006 and is the kind of timeless wisdom we like to highlight again and again on Kiplinger.com.
A while back I was leading a personal-finance seminar at a high school, and I posed this question to the teens: "When you see a man cruise by in his $65,000 BMW 550i, what do you assume about him?" The answer: "He's rich." And a man who drives by in a ten-year-old Chevy? "He's struggling."
Elusive realities. Just the answers I was looking for, and they provided a launching pad for a lively discussion of deceptive appearances and realities. By the end of it, these teens had a clearer sense of how little you can determine about wealth from a person's visible consumption. The BMW, I noted, is probably leased (perhaps for three years, no money down), so we can infer only that the driver earns enough to handle a $1,131 monthly lease payment. We know nothing about his net worth, which may be great ... or may be almost nonexistent.
And the man in the old Impala? Maybe he is struggling financially, but there's another possibility: His income is just as great as that of the dude in the Bimmer, but he's not saddled with a lease payment -- and he's investing the money in mutual funds that are growing at 10% a year.
The message in all this: The biggest barrier to becoming rich is living like you're rich before you are. Why? Because all that discretionary spending -- the chic apartment, frequent travel and restaurant meals, consumer electronics, fancy clothes and cars -- crowds out the saving that will enable you to be rich someday.
I often hear complaints from young adults, twentysomethings to those in their early thirties, that they'll never be able to buy a home because they can't afford the down payment. But when I probe them about their budgets, I find that they earn enough to make a down payment in just three or four years -- if they cut back on their spending, and if their starter-home expectations are reasonable.
Know who grasps this best in American society today? Recent immigrants, whether they're from Latin America, Africa, Asia or Eastern Europe. Many of them come to the U.S. almost penniless. They work long hours at modest wages and send some of those earnings to relatives back home. But, miraculously, they still have money left over each month because they live simply. Often they double up with friends and family in crowded housing.
What do they do with their savings? They buy a home, often in a less desirable neighborhood that other strivers are leaving behind. They fix it up, rent rooms to friends and relatives, and then trade up to a nicer home. They may keep their first and second homes as rental properties, becoming hands-on landlords.
A niece of mine sells new homes in the outer Virginia suburbs of Washington, D.C. The houses cost $500,000 -- a "middle market" price in this affluent area. Many of her buyers are Latinos. They don't look or act rich, and they often need translation help. Many of them arrived in the U.S. with nothing but ambition. They worked hard, started small businesses and saved 30% of their incomes.
Someday, when they finally feel as financially secure as they will actually be, they might start living it up. They might buy -- not lease -- a BMW, most likely a used model. High school kids will assume them to be rich and cast admiring glances at them and their fancy cars.
Proudly invisible
But just like overspending, the habit of frugality is hard to break. Maybe these folks will just keep the old Chevy. They will remain proud members of the Invisible Rich -- a growing army of super savers whose net worth is more impressive than their income. They'd rather live within their means, sleep well and forgo the covetous attention of their fellow citizens. Not a bad way to live at all.
Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.
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Reader Comments (5)
Posted by: Ann at 01/02/2010 05:51:17 AM
That's great for them, but they also get the benefit of subsidies that we don't. We shouldn't have to even struggle for a down payment when Fast Company Magazine reported last month that the median income for the 50% of taxpayers is $32,0000 at the high end. This figure virtually hasn't changed since 1985.
Posted by: Renata at 01/02/2010 09:31:33 PM
The deeper view of what's behind the flashy BMW and the ten-year-old Chevy is so true. I work as a bankruptcy paralegal and I have met so many people driving luxury cars and filing for bankruptcy be it Chapter 7 or Chapter 13. I could be telling you stories! A couple leasing 2 Mercedes pays around $1700 a month for leasing the cars. And they feel so entitled to this! For me, this is mind-bogling and stupid way to spend money. How can someone waste so much money just to commute to/from work and run errands? I also noticed how financially ignorant people are, how ignorant they are about their budgeting and how ignorant some of them are about the kind of mortgages they got themselves into during the boom of the housing market. I have been working in the bankruptcy law since 2004. Our clients were mostly low income people at that time. Nowadays, single people and families with annual earnings of $100,000 are joining them in filing for bankruptcy. The more money they earn, the more they owe.
Posted by: Take Another Look at 01/03/2010 04:21:27 PM
I was all for this article until the liberal bias of immigration was thrown into the mix. "They buy a home, often in a less desirable neighborhood that other strivers are leaving behind." It is apparent that this writer did not grow up in Southern California. Where such less desirable neighborhoods such as Compton and East Los Angeles are now predominately Latino...Now.. when African Americans were home owners in these areas and did what they could to maintain their homes market value - next to a home that "Often they double up with friends and family in crowded housing" it became very difficult to do so. Most of these folks that would "double up" to save money would not keep the lawn up and would crowd out other neighbors who would want to park. Or the houses that would "double- up" would just park their vehicles on the lawn, thus keeping these neighborhood less desirable and the market value low. I understand trying to institute the habit of frugality and I feel that overall this article is nice -however, I feel that there are many assumptions that are passed on by saying that immigrants know more about frugality then those who are native Americans. Sure, if I came from a country that only paid me $5 a month to a country where I was now making up to to $15 per hour under the table, I am sure I could and would learn to be frugal. However, since I am an American Citizen, I am forced to provide a social security number to prove my legality. I also have to provide my social security number for housing and renting. Which are factors I am sure most immigrants do not have to take into consideration. Sorry to say, but this article's idea of being frugal is an immigrant arriving to the New World -then I may wish to rethink the overall legitimacy of Kiplinger being a creditable financial magazine.
Posted by: Tom at 01/04/2010 02:49:05 PM
"Take Another Look"... those are some harsh assumptions! I was going to joke about how when the High School Kids see the frugal Latinos in their BMWs, they would assume Drugs before Rich, but I think "Take Another Look" already made the joke about stereotypes, albeit unintentionally! No need to get offended; many immigrants come here and go through a long-winded naturalization process and live according to the scenario Knight talks about. Many "native Americans" make really dumb financial decisions. Nobody said they know more about frugality than US Citizens. Also, his example certainly doesn't denigrate the integrity of Kiplinger magazine.
Posted by: Richard Cooper at 01/08/2010 12:59:25 PM
Great article and it is all reality in my opinion. I am very much one of those people who had no money until I started my own business. I was never given anything, but being a saver for many years I was able to create my own fortune. I buy new vehicles with cash and never finance anything and keep them at least 10 years. My daily driver is a 1996 GMC pickup. People see me drive by and think I am working paycheck to paycheck but they have no idea. I am truly living the american dream. To all the people out there who would like to be financially independent there is a book I would recommend called The Millionaire Next Door. I am sure Knight would also recommend this book.