About a decade ago, one of my wife’s friends (let’s call her Stacy) relayed this piece of information to us:
Husband Jim and I are moving to the East Coast for jobs. The money is too good to pass up. We’ll be making about $500,000 per year as long as the contract lasts!
I was blown away.
At the time, our household income was around $90,000 and I thought that was great. I knew Jim and Stacy made good money, but I had no idea they made that kind of money. They had no children and were in their 30s.
While our friends were on their money printing adventure, my wife and I flipped houses. We had a good system and made great money. We specialized in higher-end homes where people would pay a premium for the fancy cabinets and granite we installed.
Eventually, we worked our way up to a lakefront flip.
When We Discovered That Our Rich Friends Weren’t So Rich
After a long search, we found a couple of flip candidates. Since they were both on prime lake frontage, they were expensive.
One of them, despite its dilapidated condition, would set us back $595,000. It was at this time that we had another interesting conversation with Stacy. She had this to say about our potential purchase:
You are buying a home for $595,000? WOW! Jim and I could never afford a home that costs that much! We wouldn’t even have the down payment!
I was blown away for the second time. Jim and Stacy were making more than 5x what we were, but somehow, weren’t doing as well financially. I couldn’t reconcile the fact that they made huge money, but had little to show for it.
This seemingly incomprehensible situation fascinated me, so I started paying close attention to their lifestyle and it didn’t take long to figure out what was happening. They were clueless about investing, spent money like drunken sailors and were allowing lifestyle inflation to eat what remained of their money.
Stop The Completely Clueless Investing
Jim and Stacy don’t have any idea about how to invest money. The statements they make cause me pain. Jim once told me this:
I’m going to watch the bald screaming guy on that TV show and do everything he recommends.
Recently, Stacy made this declaration:
The recommended amount of stocks a person should hold is 5.
In addition to taking advice from the TV and buying 5 stocks, Jim and Stacy have invested in many friends’ restaurants and other small businesses, some of which didn’t even make it a year.
Advice from screaming people on TV and buying individual stocks are recipes for disaster (the restaurant/small business investing borders on lunacy, so I’m not even touching that). The average person doesn’t have the time, energy, interest or knowledge to keep up with individual stocks.
Also, most fund managers with MBAs from fancy schools can’t beat the indices, so what makes you think you can?
I read recently about how Tim Ferriss asked Warren Buffett the following question:
Buffett’s response was simple and easy:
I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…
If index funds are good enough for the most successful investor in the world, they’re good enough for Jim and Stacy too. An account with a provider like Betterment, which also invests in index funds, can be a great first step for investors.
Cure the spending problem
One of Jim’s favorite sayings is:
I’m going to buy it now and figure out how to pay for it later.
I wince every time I hear him say that. Unfortunately, it’s an accurate reflection of his spendy ways.
I went to Costco with Jim and saw his crazy spending firsthand. His wife had sent him there to pick up a couple grocery items for dinner. By the time we arrived at the checkout lane, there was $500 worth of random stuff in the cart including sunglasses (multiple pairs), electronics and office supplies. The Costco trip was nothing compared to Jim’s car habit though.
Shortly after starting the new consulting gig, Jim told us that he bought a luxury car, setting him back about $50,000. Fine, this isn’t so bad when your household income is $500,000. However, it didn’t stop there.
He went on to say that he bought a normal car too, setting him back another $20,000. He explained that he didn’t want the employees of the company he consulted at to see him drive up in a fancy car and be resentful, so he needed the cheaper car as well.
However, the insane car spending didn’t even stop there. No car stays with Jim for longer than 2 or 3 years and these cars were no exception.
Jim derives joy from buying stuff, but the happiness ends at the point of purchase. Jim and Stacy’s home contains shelves and shelves of unopened items. Stuff is purchased, stored away, and never thought of again.
I have an idea about why Jim is the way he is. He grew up in poverty and had nothing. My guess is that his adult spending habits are a reaction to his poor childhood. He is making up for what he didn’t have.
Imagine being stuck in a desert without water for two days. When you finally found water, you’d be drinking like there was no tomorrow. Jim likes to spend like there is no tomorrow.
Jim could benefit from some professional help. He has some issues that he needs to work through. He hasn’t adapted well to being a highly paid adult.
Jim could also use a budgeting program like You Need A Budget. I suspect that he doesn’t have any idea how much money is going out the window every month. He could also automate his savings with one of the best apps to save money.
Beat down the Lifestyle Inflation
Lifestyle inflation is the great slayer of newfound wealth and most of us suffer from it to some degree. Do you know anyone who keeps driving the crap car they had in college or eats the same stuff (I’m looking at you canned spaghetti)? However, Jim’s lifestyle is inflated to the extreme.
I was at a party once with Jim and some of his high flying consultant friends. It was after a successful software release and everyone was exuberant. Jim’s consultant friends were each bragging about the new car they just purchased. One guy had a Porsche Boxster. Another had an Audi TT. I was still driving my old Honda with 200,000 miles on it, so my mouth remained tightly shut. However, Jim had a new car to brag about too.
The lifestyle inflation didn’t end with cars though. I noticed that Stacy and Jim went out to eat very regularly and it was usually a $100+ affair. They’ve been to the Super Bowl, the Olympics and multiple games of the World Series. They bought a timeshare in Hawaii. They take rides on helicopters and own shoes that cost $500. On and on.
You don’t have to be super-frugal, but you shouldn’t ever forget where you come from either. It’s OK to treat yourself, but make sure you’re saving for the rainy day first. Earning $500,000 a year should easily let you do both.
I’ve been tempted to anonymously send Jim and Stacy a copy of Your Money or Your Life multiple times. I haven’t and probably never will, but I often think about how they would respond.
True Happiness (and the Desire to Retire)
I often wonder if Jim and Stacy are truly happy. They are nice people who are smart and work very hard, but they are caught on a hedonic treadmill trying to keep up with fake people in a fake world.
If they don’t change their ways, they’ll find themselves working for a very long time. Perhaps they’re OK with that. Maybe their jobs are such a part of their identity that they don’t have any desire to retire.
I admit too that I enjoy my job as a computer programmer. However, as long as I have to trade my time for money, I must do what my boss tells me to do for 40-50 hours per week. I can live with this now because I have a boss that I respect, but I have also had bad bosses who I could barely tolerate.
My goal is to become financially independent. For me, the best part of having money is the world it opens up. Once you have enough, the options are limited only to your imagination.
At the very lowest level, financial independence is an insurance policy for the surprises life may throw your way:
- What if a loved one gets sick and you need to care for them?
- What happens if you get sick are unable to work?
- What happens if you work for a company like Enron and the rug gets pulled out from underneath? What if you have an outdated skillset?
At a higher level, financial independence gives you awesome options:
- Pursue your passions, regardless of income
- Travel for months at a time instead of days
- Or stay at your job because you truly love it, not because you need the money
Back to Jim and Stacy
I hope Jim and Stacy are really doing alright. I hope their marriage lasts and they never have to struggle with money. I hope that they are happy with their jobs. I hope they are happy with their lives.
However, I also hope to hear them talking one day about how frugal they’ve become and how they’ve managed to save 60% of their income.
I can dream, can’t I?