Personal Finance

Actual wealth vs perceived wealth

My son, Robbie, approached me this week and said I have a perfect poem for you dad. I think you can use it for your work. Here’s the poem:

SMART

My Dad gave me a one dollar bill

‘Cause I’m his smartest son,

And I swapped it for two shinny quarters

‘Cause two is more than one!

And then I took the quarters

And traded them to Lou

For three dimes – I guess he didn’t know

That three is more than two!

Just then, along came old blind Bates

And just ‘cause he can’t see

He gave me four nickels for my three dimes,

And four is more than three

And I took the nickels to Hiram Coombs

Down at the seed-feed store,

And the fool gave me five pennies for them

And five is more than four

And then I went to show my dad

And he got red in the cheeks

And closed his eyes and shook his head

Too proud of me to speak!

By Shel Silverstein

Author of Where the Sidewalk Ends

Robbie is one of these kids that seems to understand the value of money and has been able to grasp it at a young age. He was the child who brought $10 of his own money to one of our most popular summer festivals and decided that it was too expensive to buy 2 lemonades for $10 to share between his brotherswhen he could buy 4 or 5 slurpees at Macs for less than $10.

More is not always better

For me, the lesson I hope adults get from the poem is to recognize value and understand that more is not always better. We live in a society that always promotes more is better. Think of some of the messages we hear in marketing . . . Supersize it! 2 for 1! or Get more for your money.

Sometimes we lose sight of what real wealth means and focus too much on perceived wealth.

Perceived wealth

My other son Connor saw a little red sports car drive past my 10 year old minivan and said “Hey Dad! Did you see that car? That guy must have lots of money.”

He thought for a second and then asked “Dad, why don’t you have a car like that? Do we have no money?”

How many of us are like Connor? When we see someone with a beautiful house, a great car, vacation property and nice clothes don’t we immediately jump to the conclusion that they have wealth? The problem is it could be an artificial measure of wealth. What you may not see is the mortgage behind the house, the lease behind the car, the line of credit to support the vacations and the credit cards to support the spending. I’m not saying everyone with nice houses, cars and suits have lots of debt but the point is we don’t know if they do or don’t.

Related article: How much debt is too much debt?

Actual wealth

The better way to measure actual wealth is through the net worth statement because it takes your total assets and removes your total liabilities.

Related article: How to calculate your net worth?

Perceived wealth looks only at assets and more the material assets. Actual wealth is a better reflection because it removes the liabilities to attain that wealth.

The net worth statement is a great benchmark for actual wealth. You should always know what you are worth and then make sure you are increasing your net worth year after year. If asset minus liabilities equals net worth then the only two ways to increase net worth are to increase assets or decreaseliabilities.

It’s not what you make but what you do with it that counts

I’ve seen so many people with great incomes but horrible net worth statements because they spend all the money they make and use that income to secure debt that then allows them to live beyond their means.

I’ve also seen people with modest incomes but exceptional net worths because they live within their means and they utilize their means to increase their wealth. Ironically, the more you spend on your houses, cars, clothes and vacations, the harder it is to increase your wealth.

Related article: Know your spending . . . live within your means

In the end, more may not always be better. What do you think?

Comments

  1. Amit

    This is a simple article but with a great insight!

  2. Asset-Grinder

    Sure I can afford a Ferrari and want one but its a want and not a need! Too many people these days chase their wants ( fancy car)and not their needs ( a good passive income stream so they can retire). But that is life!

  3. Pat

    People are too focused on appearing to be rich than actually holding onto money. In actually, nobody cares what if you are rich, unless they are planning to rob you!

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