… And how your behavior on payday can make all the difference when it comes to building wealth.

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About Indestructible Wealth: I’m Jack Gibson. I’m your wealth strategist and I’m here to help you make some money. The Indestructible Wealth Podcast is for young entrepreneurs who want to make, keep and grow wealth to enjoy now, and for years to come.

Episode #52 – What the Poor, The Middle Class, and the Wealthy Do on Payday

Transcription:

Wealthy people take decidedly different actions than others. We can chalk it up to luck, inheritance, specialized gifts like athletic or musical/acting talent, and release ourselves from taking personal responsibility in creating wealth. The vast majority of people who have built wealth didn’t do it with any of these means. They did it with a process that’s available to average people like you and me.

The most important thing to understand is what decisions and therefore actions they take when they earn money. Please keep in mind that the difference between the 3 groups only has to do with finances and absolutely nothing to do with their value to society, as people, and value before God. No one is better than or worse than anyone else. My personal belief is when we start to think that we are better than others because we have more money, then that’s the prelude to a personal crash. With that disclaimer clear, let’s take a look at what these 3 groups do on payday. Payday can be any event where income flows into your life – whether it be from a W-2 job, a 1099 contract payment, a commission from a sale, profit from buying and selling a product, or income from an investment.

What the poor do on payday is they go and buy stuff. If it’s on sale then that means it’s a deal and they’ll need to buy it. They will typically spend everything they have before their next paycheck comes in, giving them no margin for error if anything should go wrong. When the tire goes flat and will cost $400 that they don’t have, this is incredibly bad luck that they can’t believe happened to them, instead of a minor life event that’s routine and typical and is expected. Gambling is also big. Slot machines, lottory tickets, keno, these games with extreme odds stacked against them are their entertainment of choice. They are also very susceptible to predatory lending, paying huge amounts towards high interest loans and paycheck cash advances.

The middle class on payday buy liabilities. We define a liability as “something that costs you money”. They may earn a very good income, but income doesn’t put you in the wealthy category. Not even close. They buy the expensive car, get a bigger house, buy the boat, the snowmobile, the motorcycle, take the expensive vacation, remodel their basement or kitchen, join the country club, and rack up a monthly loan payment that eats up their entire paycheck as fast as it comes in. They’ll take out a HELOC and instead of buying an asset that just went on sale, they’ll tap it out for consumption then have another monthly loan payment. If they earn $10,000 per month, then they will have $10,000-$12,000 in monthly expenses. It doesn’t matter that much if they get a raise or increase their sales – they will always raise their spending to match their income.

How do my cousins earn $500,000 per year for 20 years, and end up broke?

Here’s what they bought:

– the big house in their 20’s

– the lake house soon after

– the fanciest vacations

– the nicest restaurants

– the elite country club membership

– new expensive cars every 2 years

What do all of these have in common?

Liabilities.

What if they had:

– stayed in their starter home

– rented a lakehouse for a week or 2

– meal prepped and cooked at home

– played the public golf course

– bought reliable used cars

And took that savings and bought rental property, quality stocks, private businesses, crypto, and hired coaches. The story ends quite differently. They’d be multi-millionaires.

What the wealthy do on payday is the difference maker. They buy income. Yes, you can certainly buy income. What I mean by buying income is they buy assets, which we define as “something that pays you”. No, we aren’t talking about your personal residence, that doesn’t pay you unless you also rent it out and it creates positive cash flow. The wealthy reinvest their money back into their own businesses to increase revenue and the income they can expect in the future. They buy cash flowing real estate, dividend stocks, bonds, private businesses, structure private money loans, mortgage backed notes, RV parks, and alternatives like income producing cryptocurrency. It’s not that they don’t spend money and buy large homes, expensive cars, take amazing vacations or buy expensive toys. They definitely do these things and they very much want to enjoy their money. The difference is simply in the order in which they do it.

I, in fact, buy all of these things and actually very much enjoy spending money. However, I don’t enjoy spending the seed, I really only enjoy spending when it’s the harvest. In other words, I want my capital put to work generating additional income, and THEN I’ll go out and get stupid. When the Cleveland Indians played the Chicago Cubs in the World Series, I got a ticket behind 1st base for $4500. I took the rental income from my property portfolio to fund it. In 2018, I played in the World Series of Poker Main Event, a lifelong dream that started back in my college dorm room days playing for quarters with my friends. That entry fee is $10,000, and certainly, that’s a terrible bet as statistically, I had very little chance. I didn’t win, in fact, I got knocked out the first day, but I will always treasure the experience (and give it a few more tries!). When I turned 40, I threw not 1 but a 2 night party with entertainment and an open bar with full apps, to the tune of $15,000. Our family takes at least 2-weekend ski trips each winter up north in Michigan to Boyne Mountain, after hotel, lift tickets, rentals, lessons for the boys, and resort food for a family of 4 for 3 days, we routinely drop $3-$4k. Last year I surprised my wife with a new 4-carat rock on our wedding anniversary. She’s my Queen and she deserves the finest. All of these purchases certainly could be considered irresponsible and frivolous, but I do not regret any of them, because the income from my investments paid for all of them! And then that money will be replenished in short order.

It’s the order in which the wealthy do it. When payday hits, I absolutely look forward to and get a dopamine hit (feel good chemical in your brain) from buying more assets. I’ve trained my brain to get a dopamine hit because I know that I’ll be able to get more and much better items, have more fun, take more trips, and have a much better lifestyle if I simply switch the timing of what I purchase. Think about the Stanford marshmallow experiment with the cute little kids – they were given a marshmallow and told that if they waited a few minutes and didn’t eat it, that he’d bring them back another one – essentially doubling their consumption by delaying gratification. What I’ve personally seen happen is not a double increase – I’ve seen a triple, quadruple, and even greater compound effect where I can now consume exponentially more goods and services from simple decisions and disciplines on payday!

 

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