How to build wealth
To build wealth you need to control your assets well and avoid the trappings of a middle class existence. Sure, a big house and a big car may offer the illusion of wealth, especially in the minds of your neighbors but winning the game of wealth creation requires keeping the ego in check.
Here about the real estate millionaire who rents the place he lives?
Yes that’s me.
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Why would somebody with a sizeable property portfolio resort to renting?
In his book, Rich Dad Poor Dad, author Robert Kiyosaki tells us that the difference between the rich and the middle classes isn’t the amount of money they have, but their attitudes towards ownership.
The middle classes want to own everything: they want to own a bigger house, bigger car, bigger whatever.
They want it all because they’ve seen the ad on TV.
The rich, however, want to own as little as possible. For them, the game is about control. It’s much better to control an asset than to own it. It’s tough. You have to keep your ego in check. Your ego wants you to go out and buy all the outward signs of wealth to impress others, but if you want to create wealth, you might have to accept (on the outside at least) you look just like everyone else.
The best off-road vehicle is a hire car
It’s the same reason I don’t own a car.
If possible, I rent.
Where not possible, my wife owns the car in her name and we choose as cheap and functional a car as possible.
Believe me, the best car I ever drove was a dusty, beat-up old hatchback I used to hire from an agency when I lived in the Canary Islands. It was caked in dust and sand blown in from the Sahara desert. I think in the 18 months I drove it I changed the oil once. My wife wanted to wash it one day because she couldn’t remember what color it used to be. I told her I liked it as it was.
And I’m a guy who’s owned luxury cars. It wasn’t a good relationship at all. Once you’re done with impressing people you don’t know and don’t care about, these negative assets are only a black hole that sucks up your cashflow and destroys wealth creation.
Partly because of my location independent life, living and traveling in 4 continents in the last 5 years. But, mostly because of what economists call “The Endowment Effect”.
In his book, Essentialism (link to my review), author Greg McKeown explains how the fear of loss can lead us to behave in strange ways.
McKeown recalls an experiment by Nobel-prize winning economists Daniel Kahnemann where a subject group is divided into two. One half of the group receives a coffee mug. The other nothing. The coffee mug owners are then asked how much they are willing to sell that mug for. The non-owners are asked how much they are willing to buy it for.
There’s a big disparity in perceived value.
Owners said their mug was worth around $5.50-$6.00
Non-owners said they would buy it for around $2.50-$2.70 (Half the price owners wanted to sell for).
I’ve seen this myself as a real estate property investor.
Owners consistently value their property at 10% more than their neighbor’s even though the houses are the same style, same condition. The reasons they give are logical (extended property, better condition etc), but the underlying driver is emotional (fear of loss).
Of course, home owners (like the coffee mug owners) are wrong in the vast majority of cases. They place too much value on what they own.
Which brings me to hiring cars.
Why would I do it if I could afford to buy a car?
For the same reason billionaire John-Paul Getty famously said, “buy assets that go up in value, rent assets that go down.” This is a robust strategy for long term wealth creation.
A new car is the worst “investment” you can make. Unless it’s a collector’s item, the value almost halves as soon as you drive it off the dealer’s forecourt.
If the price is right, a hire car with the right cover won’t lose you money. You don’t fear loss. You can be rough with it. That’s freedom. Freedom from worrying about some idiot dinging your valuable car in the parking lot.
As the old saying goes, the best off-road vehicle is a hire car..