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Wealth Creation Habits – A.Wealth Destruction

Check the transcript of the video here:

Hi. My name is Maciej Stanek, Financial Advisor at Veurr. In this series on wealth creation habits, I will discuss the habit that leads to wealth destruction as shown by line A. Before I get into that, I want to explain how we are measuring wealth accumulation, or in this example, wealth destruction. You can see that the vertical line measures overall wealth. The horizontal line measures time. The diagonal line moves from the intersection of wealth and time on the bottom left-hand corner in the right direction. Therefore, the diagonal line represents the individual’s wealth over time. You may have also noticed that there are no numbers on the vertical, horizontal, or diagonal line, as the chart can apply to anybody with any amount of wealth at any point in time. I purposely didn’t choose a 25 year old who has too much credit card debt and whose total income is not enough to even pay the interest on their credit cards, nor a 65 year old who has a reverse mortgage on their home, yet still has to draw down equity to pay their living expenses.

Yet the chart can apply to both of these examples. The diagonal line represents any individual who has a habit of spending more money than they are earning. In a mathematical representation, this could be shown that for every $10 earned, 11 is spent and that no matter the amount of wealth you possess, it will decline over time and if you replicate this over and over, it will result in line A that you can see here. In the introduction video of this topic of wealth habits, I stated that the rich get richer and the poor get poorer, not because of the money they have, but due to their money habits. There is an example of a very wealthy Australian whose father was worth over 6.5 billion when he passed away. His father passed on all of his wealth, including successful business assets to his son. Fifteen years later, his son’s wealth is about 5.7 billion. You’d assume that if the rich always get richer, the sum will be worth over 6.5 billion, 15 years on.

Maybe he does not possess the appropriate habits, regardless of the privileged position that money put him in. I can also share an example of a couple I met very early on in my financial planning career. This couple were diplomats from a European country. They were paid $200,000 income per annum between them. Their residential costs were paid for by the embassy. This included rent, electricity, and insurance. On top of that, their residents was cleaned at no cost to them and they could eat most of the time at the expense of many of the hosts they interacted with as part of their position. They also informed me that they were allowed to import a Mercedes-Benz from Europe and avoid all the taxes you and I have to pay on a similar vehicle when we purchase it. So much so that when they sold this car two years later, they would make more on the secondhand sale than it cost them to buy the car in the first place.

With all this in mind, do you want to know why they came to have a meeting with a financial advisor in the first place? It is because they’d reached a limit of $200,000 on their credit card and the bank would not increase their limit any further. When I suggested that they start using their above average income to start paying down the debt, they refuse to acknowledge that their spending habits were a problem. They were quite angry that I would not help them obtain more debt to cover their existing debt and obviously never became my clients. The reasons need to be identified and addressed. Bad debts will be covered in another video, but lack of respect for money is most visible when an individual exchanges money for some item or service, which brings them no utility or benefit. Oftentimes, the thought process behind an exchange of this nature is it was only two bucks, it was only 10 bucks or was only $50 or it was on sale.

That same money could have been used more wisely if it was respected. This habit is better addressed when an individual has little to no wealth. If they address the habit and their wealth increases, they start to value money more due to the effort it took to acquire and build. When an individual has these habits with a large pool of wealth to start off with, it could destroy much of that wealth in the learning process. Beating this habit is easier for some than others. In my experience, the people who you surround yourself with contribute to overcoming this habit. If your family and peers are middle class citizens, you behave similarly with money to what they do, and if your family and peers are wealthy with respect for money, you’ll share their habits and become wealthy, coming back to the statement, the rich get richer and the poor get poorer. Whatever is referring to the fact that if your family and your peers have habits that lead to poverty, you know no other way.

If you relate to what I’m saying, then you need to start to put together a budget outlining your income and expense. Start putting together a strategy to shake this bad habit and improve how you obtain and retain money. I personally believe that everyone in Australia is able to achieve financial freedom if they want to, but this bad habit needs to be eliminated first.