By John Grace
Let’s begin with a great quote by Charles Noble: “First we make our habits, then our habits make us.”
This sage observation reminds us of the power of repeated actions, of our habits and what they can do to us or for us.
We will examine how the wealthy pass on wealth to their heirs while the poor transfer debt. While there are many reasons, for one current example, we need to look no further than how the two groups paid their way in the recent Black Friday and Cyber Monday sales.
Adobe Analytics reported a record $9.8 billion in Black Friday online sales, up 7.5% from 2022, not accounting for inflation. And for Cyber Monday, consumers spent $12.4 billion, a 9.6% increase from 2022, according to Forbes. Of course, this is excellent news for the shareholders and the companies like Amazon that reported the combination was “its biggest ever.”
One of the reasons this is a worthwhile exercise is for consumers to prepare for holiday spending predictions and to plan how to develop new habits to win the money game. Between Nov. 1 and Dec. 31, American consumers will likely spend between $957.3 billion and $966.6 billion, an increase between 3% and 4% from 2022. E-commerce sales will increase even more.
Per Deloitte, 2023 holiday spending per person is expected to be $1,652, surpassing pre-pandemic figures for the first time.
The “buy now, pay later” plan use is expected to boom again this year. That’s great for the retailers. But credit experts are sounding the alarm about “loan stacking.”
LexisNexis Risk Solutions provides many buy now, pay later lenders with alternative credit scores for assessing consumers seeking loans, including those who may not have a traditional credit score. Thanks to recent research, the company discovered that pay-in-installment loans attract more non-prime (including subprime and near prime) credit applicants than conventional banking products and that the users are more than twice as likely to be under 35.
As you pass the turkey dressing, please discuss how the road to wealth is not paved with debt on things that only depreciate.
The lifestyle of the rich is all about saving money before they spend anything and delaying gratification. Poor people are financially undisciplined. While the rich act poor to stay rich, the poor spend like drunken sailors to appear rich.
According to Marathon Digital Holdings there are five financial rules that separate the wealthy and the poor.
The first is “the wealthy prioritize saving, the poor don’t.” The wealthy are aware that earning more than spending is critical for wealth multiplication. So they commit themselves, start early, plan and remain consistent to progressively build wealth. They don’t wait to see what’s left over at the end of the month.
Rule 2: “the wealthy budget, the poor don’t.” The wealthy are very intentional or deliberate about their money. They don’t just budget for big-ticket items, they plan for small, miscellaneous expenses.
Apart from having financial planners who help them with short, mid and long-term goals, most rich people follow the 50-30-20 budget rule: needs (50%), wants (30%), savings (20%). They tweak this rule to greatly reduce the 80% and increase the savings percentage.
Rule 3: “the wealthy avoid or properly use debt, the poor create and ignore it.” It might seem like a no-brainer, but wealthy people hate being in any form of debt. They avoid credit cards and would rather invest than pay interest to a bank. When they have to borrow, they do so at a lower interest rate and use debt only for leverage on acquisitions they believe are likely to increase in value.
Rule 4: “the wealthy have multiple streams of income, the poor rely on one.” Beyond their primary income stream, most wealthy people tend to diversify their investment portfolios with other assets like real estate, land or other assets that provide passive income.
Instead of solely relying on their salaries, they know that the business world can be unpredictable. Hence, they prepare against financial storms and fluctuations by having a portfolio of wealth-generating assets.
And finally: “the wealthy invest, the poor avoid it.” Wealthy people are not afraid of math; they not only save but also have an organized investment plan and are very knowledgeable about their investments.
They budget at least 20% of their income for investments and set up automatic systems that seamlessly transfer cash into these accounts so that there’s a continuous supply of funds for more investments.
Word to the wise. Black Friday and Cyber Monday are traps for those who feel so pressured to buy something that they make poor choices.
Rather than practicing the habit of “spend baby, spend,” exchange the ill-serving pattern for a healthier policy of “save baby save” before you buy anything. And embrace Dave Ramsey’s wisdom, “If you can’t buy something with cash, don’t buy it. Debt (on non-appreciating assets) is debt. It will hurt you, no matter what the interest rate is.”
Rather than let you shop until you drop, only to make the retailers and stockholders even richer, let me encourage you to set good habits now so you begin to materialize more in 2024.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here for general information only and are not intended to provide specific advice or recommendations for any individual.
While the rich act poor to stay rich, the poor spend like drunken sailors to appear rich.