Rich is Loud

Why does a person who hits the lottery go broke, on average, within 2-3 years? Is it solely because they buy everything on their bucket list, quit their job, or financially support their friends and family? No. It is because they are thinking about their money backwards and ignoring the opportunity cost of their decisions.

There is a saying: “Rich is loud, and wealth is quiet.”

A lottery winner is rich, not wealthy. From the IRS’s perspective, they might have been making $50,000 per year in 2012. Hit the lottery in 2013 for $3,000,000, and then made $0 in 2014, 2015, and 2016, before returning to work in 2017 at $50,000 once again. The IRS sees the income of that individual. For one year, they had a very high income that bumped them into a high tax bracket. Then they were unemployed for a few years before returning to work. I bet they did a ton of “loud” and flashy things during those 3 years while spending the lottery money.

Were they thinking about taxes, insurance, estate planning, and investment returns, or the cars, house, and vacations they wanted to have? That is a natural way to think if you have lived your whole life without those things. It makes perfect sense.

A wealthy person thinks about money differently from a poor person. They weigh what is called the opportunity cost of financial decisions.

Let’s say someone got their first job and they have saved up $25,000. They want to upgrade to a better vehicle and start investing for retirement. They have the choice between buying a $25,000 brand-new car or a 5-year-old $10,000 car. If they purchase the $25,000 car, they give up the benefit of investing. If they purchase the $10,000 car, they give up the perks of the brand-new car but can start investing. This is the opportunity cost.

Sadly, many people do not fund retirement until later in life because they make the $25,000 decision constantly with no thought of what they are losing out on.

The great thing is that in America, we get to choose between different options. The downside is that too often, the easier option is chosen.

Wealth is all about planning for the years ahead, not today.

A wealthy person thinks about the ways to build wealth through hard work, saving and investing, minimizing taxes, and, of course, protecting themselves from financial ruin through insurance and estate planning.

Eventually, wealthy people can choose a brand-new car, a bigger house, and give generously to people in need. It is not an either-or forever.

Sounds boring to some, but that is the quiet part of wealth building.