Have you read How Not To Become Millionaire?
The moment Johnny chose to enroll into the private university, he has been placed onto high roller of debt and consumption. The average tuition fee of private universities is few times higher than those of public university. His peers, most of them are from rich and wealthy families whom also have a lot of free money, given by their parents, lying around for disposal. In order for Johnny to blend in to his new friends, he has no choice but to join his peers in most of the high consumption activities hence started to cultivate the consumption patterns.
1. Start Up High and Get Higher
Johnny’s father thought of kick starting Johnny life really put him high up above other fresh grads (Let us pick one of the fresh grad for example, his name is Jimmy). Jimmy started with monthly salary of $2,500 per month, yet he only owned a car half the price of Johnny’s. If let say 3 years later both Johnny and Jimmy decided to upgrade their vehicles, who do you think has a high barrier in term of cost to upgrade, Jimmy or Johnny? The answer is obviously Johnny. With his first car cost up to $70 thousands, he would probably think of buying a mid-size car that easily cost up to $120 thousands. Where by Jimmy would probably go for the entry model of Japanese cars that costs up to $60 to $80 thousands, still almost half price of what Johnny’s upgrade.
2. Opportunity Cost
Johnny paid $600 per month for 2-bedroom apartment, yet if he chose to share it with one of his friends; he would have saved half of the rental and put them into saving account. A saving of $300 per month can become $3,600 per year and $7,200 in two years. By the end of second year he could have $7,200 saved from the rental and started investing.
3. Long Term Surrounding Influence and Loss of Time
Johnny has cultivated the high consumption ways of life since early of his adult life. That also explained the method he used to release stress over busy working life. Partying and bar hopping, happy hour many nights in a week. He wasted a lot of valuable time in these unproductive activities when he could have done something more beneficial for his future, such as read up a book or plan for his financial future.
4. Instant Gratification and Pursuing of Material Items
Like most of the people, Johnny practice instant gratification. He bought expensive gift for himself, and roll them all into credit card debt. Even though he only paid as little as $200 per month, which he thought was a smart move, yet the most he spent paying every month was the cost of money, which is the interest rate. Remember that Johnny’s friends are mostly from rich family, throughout university life and they have been frequently hanging out together. The spending patterns and buying choice of his friend largely contributed to Johnny’s clothing and goods brand choices. Since his friends are from rich family, it is natural that they have very different perception on value of money against brand. Living under peer pressure, Johnny would gradually adjust his value judgments on material items, without him aware of it.
5. Asset or Liability?
Johnny doesn’t understand the meaning of asset and liability. Simply put, asset will put money into your pocket but liability will take money away from your pocket. When he bought his first condominium, he thought it is an asset, because the real estate broker and banker told him so. And so Johnny got the biggest unit in the floor. However, since he paid more than thousand every month, it is definitely a liability. It is an asset, but it is the bank’s asset because bank get paid in term of interest every month, and bank would get paid as long as Johnny services the loan.
6. Snowballing High Consumptions
A nice condominium unit in the mid-upper class area contributed heavily on Johnny’s future consumption patterns. First of all, a nice condominium unit will not be completed without a tasteful touch of renovation and interior design. Johnny borrowed heavily on personal loan in hiring contractor and interior designer. He spent all his saving in acquiring tasteful looking furniture to go along with his home décor. All his furniture designs has to blend well to the décor, else it would seem out of the place. Imagine what would happen if a piece of budget sofa sits in that tasteful design living room? And where can you put the cheap carpet? Besides, in order for him to blend into his rich-looking neighborhood, he saw no choice but to upgrade his car to a full sized. It costs him double the price of his previous car, another fresh liability rolled into his balance sheet.
7. Lack of Financial Intelligence
Even though Johnny earns very high income, he has no financial education. He couldn’t distinguish investment from gambling. That’s why he liked to relate stock investment to gambling which equals to buying a lottery ticket and not winning. He didn’t realize it takes a lot of financial literacy to excel in stock market, the financial intelligent required to read and understand financial statements and economical variables. The reason he made a loss in stock market and mutual fund was because of buying people ideas instead of his own intelligent. He didn’t realize hot mutual fund will eventually get cold. It is the slow train that takes you cross countries. Insider tips most of the time turns out to be a hype that speculators purposely created to make instant gain out of the loser – Johnny.
8. Work Hard to Increase Liability!
Johnny lived in delusion, believing that the more he earns, the more likely he will become rich. He hoped that one day he could also become wealthy by first having nice car and house. That’s not likely to happen. He didn’t realize his neighbors moved into the area only after they got wealthy. As Johnny’s income increase over the year so does his expense. There are many factors that could contribute to his rising expenses; his adopted way of life to instant gratify, pursuing of material items, and environment impacts. The problem will multiply when he has a family, Johnny could never imagine his way of life could have profound effect in his loved one, such as his wife and kids, and very likely they too, will adopt his spending patterns. This is when trouble is looking for more trouble.
