Misconceptions of visible wealth #1: Correlating someone's home value and their net worth (wealth)
Spending is visible - Savings is hidden.
Misconceptions of Visible Wealth
People will frequently make assumptions about someone’s income and wealth based on:
the home someone lives in
the car someone drives
the clothes someone wears
the vacations someone takes
… and very often these guesses will be WRONG!
When someone purchases a house, all you see is the house. In reality, the only thing you know is the price of the house they purchased (especially with Zillow being so handy). In reality, since the majority of homes are purchased with mortgages its very possible they were just willing to sign up for monthly payments. You don’t know if they paid cash for the house or only had a 20% down payment. You don’t know if their mortgage payments are $6,000/month or $2,000/month.
Sometimes we equate someone purchasing a home as financial success, but it could be the opposite. All we see is the house, and make the potentially false assumption that if they successfully acquired it, they probably have their money under control.
Living in a more expensive house doesn’t mean someone has reached financial success. Financial responsibility shouldn’t be measured by visible possessions. In fact, someone taking on a large mortgage might limit their ability to save adequately for vacations or retirement.
You also don’t know what % of their net worth this home equity represents. Majority of people building wealth and saving for retirement have far more (typically 2-3X) the amount in their 401K compared to the equity in their home.
2 Personal Finance Examples:
Example #1 (username ‘moominoid’):
Home Value $809K less mortgage $291K = $518K Home Equity (20% of net worth)
Retirement Accounts: $1.5 million (2.9X home equity)
Net worth $3.9 million
Income: $150-200K/ year
Level #7 of financial independence
Example #2 (username ‘firebrand’):
Home Value: $1.45 million less mortgage $645K Home Equity (66% of net worth)
Retirement Accounts: $587K (<1X home equity)
Net worth $2.2 million
Income: $200-250K/year
Level #6 of financial independence
#1 above - $3.9 million net worth / lives in $809K house / $150-200K income
#2 above - $2.2 million net worth / lives in $1.45M house / $200-250K income
The purpose of this comparison is not about right or wrong financial decisions. Life is about making whatever financial decisions are right for you and your family. This example is to show our misconception of someone’s wealth or financial condition.
Example #1 lives in a home that is valued at only 20% of their net worth vs example #2 lives in a home that is valued at 66% of their net worth. Also, the person living in the less expensive house has a higher net worth. Example #1 has reached level 7 of financial independence vs Example #2 has only reached level 6 of financial independence.
Misconceptions based upon our consumptive culture/society:
Equating money in the context of what it can physically buy
Assumptions of wealth based upon home value, what car people drive or what vacations they take
Equating material possessions with financial success
Viewing financial milestones as buying a house or car
Invisible wealth is more important than visible wealth
Many wrongly think of their biggest financial milestones as buying a new house or new car. Typically, that involves taking on more debt. However, having $0 on your credit card statements, driving a car that has been paid off or saving your first $100K are way bigger financial achievements/ milestones.
Celebrate sticking to an aggressive debt repayment or savings plan will be more challenging because you won’t receive any outside encouragement for your financial responsibility. Your biggest financial achievements will be totally invisible to the outside world.
No one will know when you are debt-free or hit $1 million in retirement savings. So strive for invisible wealth! Don’t worry about the cars and houses others have, they don’t signify financial success. They more than likely are just associated with invisible debt!
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