12 lessons the rich know on how to build wealth rather than losing money.
“Don’t buy a new car until you have a garage to put it in.”
That one line of wisdom spilled out of me as I looked at a brand new Camaro SS parked outside a rented house. A rented house that did not have a garage to protect this young man’s pride and joy from the weather. Then it dawned on me that the lesson goes much deeper than how to keep your new car safe.
Many people make a mistake by spending money on things that lose value before investing in something that appreciates. And that is the real reason they never get ahead in life.
Buying a car instead of a house is a great example. Homes gain value over time or at least retain their value, but a new car loses value when you drive off the lot. According to industry experts, a new car loses between 15–20% of its value each year. That shiny new Camaro SS cost at least $45,000 to buy (not to mention tax, title and license), but if he tried to sell it in a year, it would be worth around $37,000 for a loss of $8,000. What else could he have done with that $8,000?
If he had invested that $45,000 in the stock market, where the historical average rate of return is 10%, he would have $49,500 at the end of the year or a $4,500 increase in value. That is a difference of $12,500 (car value $37,000 versus investment value of $49,500) at the end of one year. And that is just one year. In each subsequent year, the car’s value will continue to decline, while the value of the investment will continue to grow. In ten years, he will be lucky to sell the car for half of what he paid for it, while the investment could be worth more than twice what he put into it.
How people cheat themselves out of wealth.
Spending money on things that lose value is how many people cheat themselves out of ever becoming rich. They spend money on something that loses value rather than investing in things that gain or at least maintain their worth. If he used that money to put down 20% on a house, he could have invested in a home valued at up to $225,000. Although housing prices fluctuate, a property generally maintains or gains in value over time. He would have been better off investing in a house with a garage to keep the car in than buying the vehicle.
I know what you are thinking, you need a car to get to work, pick up groceries and meet friends. I’m not saying you don’t. But do you need a new, expensive car, or could you purchase a serviceable used vehicle for a fraction of the price and invest the remainder of the money in something that will pay you back? For that matter, where else can you stop losing money?
There are several large categories where people lose money. Learning what they are and how to avoid them is a secret of the rich. You may think of the rich as the people who drive the choicest cars, but they did not get there by buying the luxury vehicle first. They got there by avoiding spending money in losing areas and instead buying things that gain in value.
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Big areas where people cheat themselves
Let’s look at a dozen areas where people frequently throw away money and cheat themselves out of gaining wealth and one day being rich.
New Cars.
We have already seen how new cars lose value when you buy them and continue to depreciate over the years. You will need a car to get around, but you don’t need a new car and certainly don’t need a luxury car with all the added expense. Instead, shop for a reliable pre-owned vehicle. Let the original owner take the initial hit in depreciation, so you don’t have to. Then keep that car for as long as possible. Frequently purchasing newer cars means you never get your value out of them. Instead, maintain your ride and plan to own it for many years. Well-made modern vehicles are suitable for decades and hundreds of thousands of miles. One of mine is fifteen years old and pushing 200,000 miles, but it still runs great, and we expect to get another 100,000 miles out of it.
Leasing cars
Everything said about buying new cars is doubly true about leasing them. You spend a lot of money to use the car but gain no equity. Sorry, but this is not the magic move to get you into a new car without sacrificing your future.
Jewelry
The value of diamonds is artificially inflated by successful advertising combined with market manipulation. Plus, the pricing of gems is subjective, unlike precious metals that can be objectively valued based on weight. The result is that you can rarely sell jewelry for the same price it cost to buy. And it does not increase in value. Of course, you will need a few lovely pieces for dress-up occasions and work events. But you don’t need a large number to choose between. I’m not begrudging anyone a modest wedding ring as a symbol of their union, but that union will be stronger if built on solid finances.
Weddings
Speaking of weddings, the high expense of weddings leaves many young couples in debt before they even get a chance to start their life together. That is a lot of unnecessary pressure on a new pair, and some marriages end before paying all the bills. Meaning these unfortunate people remain bound together by the one thing they do not want to share. At the end of a modest wedding, you will be just as married. Better yet, you will be able to move forward as a couple by building wealth rather than being burdened by debt. Know how much you can spend and set a budget. Marriages are an emotional event, and the wedding industry knows this and uses it against you, but having a budget helps keep you from getting carried away.
Latest cellphone
Thanks to the rapid advances in technology, new cellphone models are released yearly. That means that if you buy the latest model, it won’t be top of the line for long. That does not mean it your old phone is obsolete, but it is as much as 72% less valuable according to some experts. That’s a big hit for something that still works just fine. Having the latest phone is more a fashion than a technological necessity unless you a tech insider. So save your money and purchase the previous model, or better yet, keep using that old phone for as long as you can.
Boat
Do you know the definition of a boat? It’s a hole in the water you throw money into. Boats are expensive, and like cars, they do not hold their value. Moreover, as much fun as it sounds to be out on the boat, most people never get as much use out of a boat they think they will. Rather than purchase a boat, find a friend with a boat and see if you can exchange a little help working on the boat for time to use it. You will build a friendship and get to enjoy a little time on the water without the expense.
Clothing
The odds are you already have a closet full of items you rarely wear. Most people wear the same small number of clothes regularly and ignore the rest of their wardrobe. Yet, try to take those nearly new items to a thrift store, and you will be offered pennies on the dollar. Clothing does not hold its value, especially as styles and fashions change. Instead of trying to build an extensive wardrobe, focus on a few items you can mix and match for more variety. The one exception being a good suit for a man and a similar outfit for a woman. These clothes should be timeless, so they hold up well and make you look good on the occasion you need them.
Brand name anything
Brand name items are rarely worth the premium price tag. Although the quality may be marginally better, it rarely offsets the price. Instead, what you are paying for is the advertising the company uses to maintain its cachet. Moreover, to keep people buying what it has to sell, the brand name companies are constantly releasing newer products that make the old ones passé and thus impossible to resell for anywhere near what you paid for it. Don’t bother trying to impress your friends with a designer label, instead invest your money in things that gain value and your time into finding new friends who appreciate you and not the tag on your clothes.
Timeshares
The supply of timeshares far exceeds the demand, no matter what the salesman tells you. That means you will be lucky to get out of a timeshare without losing money. Add to that all of the miscellaneous fees for association dues and maintenance, and what you have is a money pit. So remember, when the slick salesperson assures you there is money to be made in timeshares, he means for him and not for you.
Media
Pretty much any media will not hold its value past the day you buy it; this includes CDs, DVDs, and, as much as I hate to admit it, books. The reality is, you don’t want to own the DVD; what you want is to see the movie. Once you have done that, the DVD becomes less valuable to you as well. So rather than buy the media, buy the experience. Check out books and DVDs from the library, rent movies online or at Redbox for a fraction of what it cost to own them.
Anything found at a yard sale
As a child, I lived near a family that hunted for bargains at garage sales every weekend. They believed that they could buy things at a bargain price and resell them at a profit. The problem was, they rarely could find anyone willing to pay more for the item than they did. Even if they did find a buyer, they measured their profits in cents to a dollar. Most of what they purchased was someone else’s trash, and most of it ended up in their trash.
Credit card balance
I have saved the most important for last. You should never carry a balance on your credit card. At 18% interest, there is no investment you can make that will return as much as you lose on paying the interest on a credit card. That being said, credit cards can be an excellent way to collect points for travel and other rewards, but only if you don’t carry a balance. If you hold a balance, the cost will far outstrip the advantage. So don’t purchase anything with a credit card that you can’t pay off when the bill comes due.
Conclusion
The sad fact is that most people cheat themselves out of building wealth by purchasing items that lose value. Losing money is antithetical to getting wealthy. The rich learn that spending should focus on items that gain value or at least maintain it. Avoid wasting money on the items listed above and instead invest in property, equities like stocks and bonds, or paying off those high-interest credit cards. Your future self will thank you for your foresight.
