Chris Rock on Wealth. Bling Bling!
I’ve been pondering this idea for a while. The easy reference is lottery winners. Winning the lottery is often a curse. Just a few months ago, the notorious Michigan woman who had won the lottery and continued to collect food stamps and public assistance was found dead of a possible drug overdose. But even beyond that, our fortunes in our lives come and go, they rise and fall and there is no guarantee of being set for life.
Seriously. Just because you made a good chunk of money doesn’t mean you will have it forever. If you don’t have a plan for what you are going to do with any amount over $250,000, you’re increasing the odds of that money slipping from your fingers very quickly. I’m becoming more comfortable with this. I know that I have the ability to make money now. Things have been progressing since 2011 and it’s exciting and fun to watch, especially since I don’t feel that emotional about it. As long as I have the money to take care of my needs and am close to the people I love, everything else is just a game I’m playing. So you might earn more money than you ever dreamed of, but it’s also easier to lose that money than you think. I live in California and I work in the construction industry, which means I get to see this more often than most people. Construction is an extremely high-risk business. Because of this, prime contractors can earn a great profit margin if they do their work well and escape from a job without major litigation. There were so many contractors making easy money in the construction boom and way too many people thought it would last forever. Owners had to beg contractors to bid their jobs because there just weren’t enough contractors to meet the demand. Contractors were able to bid higher prices and negotiate higher margins for themselves. It was really good while it lasted (too bad I wasn’t in the industry yet!) but then it crashed. Hard. There was no work to be heard of. 45 contractors would show up to bid a job where a year ago you would be lucky to have two people show up and at least have some competition. Margins were slashed. Cash flow dried up. A lot of companies went out of business. I have heard these stories now dozens of times from people all over the US, so I have analyzed a few of the mistakes that are easy to fall into when you begin to earn more money than you’re used to. I want to be prepared for cycles. I want to be ready for the peaks and valleys. And I want to remember not to go out and buy a diamond-encrusted Rolex with my first chunk of change.
Easy Pitfalls of Easy Money
1. They bought too much house. This happens a lot. Many business owners sold their homes at the height of the market, gaining a nice profit, but they also upgraded to a bigger home at the height of the market, meaning a much larger mortgage payment, and then later on taking out a line of credit or a payday loan just to make the payments. If you live in a state like New Jersey with high property taxes, forget it! One friend told me his property taxes were over $40,000 per year for a very large house in Jersey. That is an average salary in the US. If your assets are tied to your business, and you are not sure whether your mortgage payment would be covered if you needed to downsize your business or change businesses altogether, you could be setting yourself up for a risky situation. On the other hand, if you can put down a large down payment and keep your payments within a range that you have been accustomed to for several years, you are going to be a lot less at-risk.
2. They cashed out of a business. In some cases, it’s great to cash out of a business in the middle of a boom. You’ll get a higher price on your business or share of the business than other times in the economic cycle and the business may benefit from a change in ownership. But if you cash out of a business and take a huge lump sum of cash with no plans of what to do next, those funds often evaporate before you even have a chance to invest in another business. Before you cash out, consider your options and have a plan for investing the money.
3. They bought unnecessary stuff first. I know this could be my first mistake. I’m really focused on staying modest and not thinking I need tons of stuff. But I can see just how easy and tempting it would be to want to buy a $140,000 “Nazi sled” BMW 760Li (in the words of Entourage) with the first $300,000 profit you make. Believe me, I know I would be severely tempted to buy a few fancy cars, hire Tego Calderon to come sing at my birthday party and wear $900 leggings for the first days of any newfound wealth. But I know. That would be bad. That would wipe out my funds and the novelty would wear off after a few days and you would realize you might have just given up several opportunities to invest in simple, cash flow positive businesses. The Chris Rock video above epitomizes this perfectly and it’s hilarious.
4. They thought the cash flow was permanent. Whether it is a business or a high salary, it’s easy to get comfortable. I’m making $20K a week! I’m rich forever! But it’s not true. Maybe a new product is having a burst of sales, maybe you got a flood of new jobs, maybe you are in a growing industry. But sales slow down, service orders go from a flood to a trickle, and you might get totally sick of your job and want to live in Peru for a year. Instead of banking on future cash flows, using incoming cash now to the best of your ability. Keep expenses low now when you can control them.
Those were just a few examples. It’s always easier to be rational when you are outside of the moment. If you can find ways to feel like you are enjoying your wealth without blowing it all in a couple of years (or less), you’re creating a comfortable future for yourself. You’ll always have risk and you won’t ever guarantee yourself 100% against losses, but if you plan a little and exercise restraint, you’ll be ahead of 90% of the population.