I recently posted in my Facebook group 49 States Real Estate Investing that
“Wealth is the difference between what you make and what you spend.”
Someone called me and said “Isn’t that just your surplus that you can then invest and what you have after that is your wealth.” True. This is something that has stuck in my head since I read Millionaire Next Door, my first and all-time-favorite book related to wealth building. I probably read this in 2004 or so and it flipped everything I knew about money. Wealth is about the money or assets you have, not the things you buy, right?
One of my favorite radio ads of all time ran in the Bay Area in 2012, for a used car company that would sell cars to people who had really bad credit. This guy comes on saying “I was a top producing real estate agent making six figures. Then the market crash came. I lost my house, my cars and my boat. "Dude, why the fuck did you have a boat? You can’t afford a boat. You have zero wealth if you have a financed boat. In fact, you have negative wealth. What if instead of buying this boat you just put that money in savings. Why did you not buy a car outright instead of buying the boat? Why not increase the equity in your home to buy rentals instead of using it like an ATM?" My 18-year-old daughter told me that she learned that you shouldn’t buy something unless you can afford to buy it twice*.
Makes perfect sense to me.
So yes, the difference between what you make and what you spend can be expressed as surplus, as wealth, as sock money-- whatever you want to call it. Keep it in the bank, put it under your mattress. But don’t leverage it into a boat. You know what I like to do with my surplus?
I like to invest it in real estate in affordable states with a solid cap rate, (but I do reserve some for stocks, retirement, and college for the kids, too). We live frugally and spend wisely. I try not to impulse buy. We don’t eat out very much. We travel on the cheap. I still thrift shop and browse the clearance rack at Target so that I can save my pennies for my next big real estate purchase move.
*I mean, except a house, which is an investment!