There’s always talk about how to create wealth. But I want to talk about the inverse today. As German mathematician, Jacob Jacobi, once said, “Invest, always invert”, when problem solving.
So, how can you ensure that you never build wealth and never reach financial freedom? It’s not that hard, I’ll show you how. Just follow these steps.
- Buy too much house
Buying too much house is the easiest way to not achieve financial freedom. Buying too much house means taking on a mortgage where the payments eat up a large chunk of your monthly take home pay (take home pay = after deducting taxes). Add in property taxes, home insurance, utilities, and repairs and maintenance , and you have housing costs that can exceed 50% of your monthly take home pay. Having housing costs exceed 50% of your monthly take home pay is a good start to not achieving wealth and financial freedom. You get to help out your local bank by paying a hefty mortgage for 25 years. You’re being charitable to your banker, who’s your buddy after all – he said so himself when you signed the mortgage papers. There’s plenty of people in Vancouver and Toronto who are doing this now. So why not join them? It’s the cool thing to do.
You couldn’t save up for a down payment so you get that money from your parents. Or better yet you borrow the down payment from from a guy giving out loans in his garage – the interest rate is only 10%.
Not all is bad though since you are building “equity” in your home. But your home won’t provide you with cash flow when you want to retire. You can sell it but then you have to find other digs. You could take a reverse mortgage but then high interest eats away at any equity in our home. For those pesky wealth accumulators, the equity in their homes is viewed as security and a last resort fallback, not a retirement plan.
For those that are building wealth, total housing costs not exceeding 25% of monthly take home pay is a path to financial freedom. But that’s not what we’re trying to achieve here.
- Buy too much car
Once our total housing costs exceed 50% of our take home pay, we can focus on buying an awesome car. A good way to buy too much car is to buy a car that costs somewhere between 50% to 100% of your annual gross income. If you make $60,000 a year, you should buy a $40,000 BMW or go for the $60,000 top model. Then lease or finance the car over at least five years to get the lowest possible payment. Keep rolling that debt into new debt. At one point, your debt may be worth more than your car. But hey at least you have a car.
Buying too much house and too much car is a good way to get on the debt treadmill for life. This isn’t all that bad though since we all need exercise.
Your car payment will probably be around 20% or more of your monthly take home pay but you still have 30% of your monthly take home pay for other expenses such as groceries, fitness, day care, restaurants, travel, clothes, furniture, toiletries, and so on.
So called “wealth accumulators” only buy cars that are priced between 10%-20% of their annual gross income. What’s the fun in buying a beater?
- Spend lavishly on wants – keep up with the Joneses
You’ve bought your house (50% of monthly take home pay) and car (20% of monthly take home pay). You have 30% of your monthly take home pay left. So you have plenty to buy those new Nike’s, new jeans, new Louis Vuitton purse, new barbecue, new sofa set, and new TV. All of your friends and family have these things, so you deserve them too. Life’s more fun that way.
You show these things off to your friends. After using them for a bit, you forget that you own them. But at least you got to show them off while they were new.
Those wealth accumulators only buy these things when they need them. They also research big purchases extensively and look at price and quality. But who has time for all of that work?
- Rack up credit card debt
You’ve spent all of your take home pay your house, car, and other fun stuff. You have no cash left. But fear not, you have those credit cards! You can use those credit cards to pay for the groceries, restaurants, gym membership, and that tropical vacation.
If you build up a credit card balance of $5,000 and make minimum monthly payments on it, it will only take you 25 years and $19,000 to pay off. Not a bad deal considering you were able to enjoy some time in the sun. But of course you want to take multiple vacations in a year so that $5,000 credit card debt should be about $15,000 this year.
Those looking to build wealth use credit cards often but always pay down the full balance each month. How is that even possible? Budgeting? That’s boring.
- Never invest your money in stocks, real estate, or a private businesses.
This one is easy. There’s no money left to invest so we don’t even have to think of investments. Thinking about investing is too hard. Too much work.
Even if you do scrounge up some savings, just put it all in a high interest savings account at 1%. You lose money because of inflation each year but atleast you’re getting something for it.
Forget about an emergency fund. You’re living for today.
Those people who save 30% or more of their monthly take home pay are liars. How is that even possible? Then they invest it in stocks or real estate? The stock market is a casino and who wants to look after tenants?
If you follow the five steps I’ve outlined above, I guarantee that you will not create wealth. It’s a great blueprint for not achieving financial freedom.