I have recently found a great video on the Internet titled What The Wealthy Buy On Payday. The video does a very good job explaining the difference between assets and liabilities, and why the rich are getting richer, the poor are getting poorer and the middle class is stressed out. Since I couldn’t find the video anywhere else in order to embed it into this article, I decided to write a short summary of what Tim Sales (the author of the video) is trying to convey.
He is basically talking about the spending habits of the wealthy, the middle class and the poor. For example, have you ever wondered what makes you wealthy, poor or middle class? I mean, every one of us lives in the same world, has the same 24 hours each day, works as hard as everybody else but then you notice that each of us will end up in one of the three categories: the wealthy, the poor and the middle class. There’s a reason for that.
It turns out that to which category you belong will depend on what you buy with your money. The things that the wealthy buy are very different from the things that are usually bought buy the poor and middle class. Below, I will give a summary of the video explaining the major differences in the spending habits of the poor, the middle class and the wealthy and how that affects their financial well-being.
Some important definitions you need to know before I can continue:
- Income – money you bring in
- Expenses – money you spend
- Assets – things that pay you
- Liabilities – things that cost you
Q. What do the poor buy on payday?
A. The poor buy “stuff”. What is “stuff”? According to the video, “stuff” are inexpensive things that people buy that they don’t really need in order to survive. Where do they get this “stuff”? They get it at a flee market, at a garage sale, at a dollar store – just to name a few. The problem with buying “stuff” is that the poor waste their money on the things they don’t need but most importantly, they miss on opportunities to make that money work for them by investing it into assets. Here’s how the financial statement of the poor looks like:
As you notice above by looking at the financial statement of the poor, the income comes in on the payday and then goes straight out the expense column to buy “stuff”
Q. What do the middle class buy on payday?
A. The middle class buy liabilities that they confuse with assets. Remember the definition of a liability? Liabilities are things that cost you. The middle class are usually the people who confuse the definition of an asset that we use in this article (assets are the things that pay you) with the typical accounting definition of an asset, which is “assets are the things you own“. That’s why they buy a big house, cars, boats, and other expensive toys thinking that all of that are assets. However, in reality, all those things are liabilities.
For example, most middle class individuals will think of their house as an asset. However, if you live in a house, you have to pay for its maintenance, utilities, insurance, the property tax (in some States), and a lot of other things associated with owning that house. If that’s the case, then your house cost you money, and is therefore a liability.
On the other hand, if you rented out that house to someone else and was receiving monthly payments from a tenant, you could call that house an asset because it would pay you money month after month, year after year. Because the middle class confuse assets with liabilities, they get in debt and work all their life for the bank, their employer and the credit card companies. They don’t invest their money into assets, which keeps them the prisoners of the middle class. Here’s how the financial statement of the middle class looks like:
As you notice above by looking at the financial statement of the middle class, the middle class is buying liabilities that they confuse with assets. That gets them in a “debt trap”, keeping them the prisoners of the middle class
Q. What do the wealthy buy on payday?
A. The wealthy buy assets. An example of an asset would be income-generating real estate, businesses, stocks that pay dividends, bonds, high yield CDs or anything else that generates more income for you. Then the wealthy take that income and reinvest it into more assets, making them even wealthier. That’s why the gap between the rich and the poor keeps growing faster than ever. While the rich continue to accumulate more assets, the poor keep buying stuff that makes them even poorer. Here’s how the financial statement of the wealthy looks like:
As you notice above by looking at the financial statement of the wealthy, the wealthy spend their income on assets that generate even more income which is then used to buy even more assets. This process continues on and on, making the wealthy even wealthier.
To recap: the poor buy “stuff”, the middle class buy liabilities that they confuse with assets, and the wealthy buy assets. Knowing what the wealthy buy on payday has helped me make much better buying decisions, and I hope you can benefit from this knowledge as well.
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