I often write on Quora.com, where I am the most viewed writer on financial matters, with over 460.2 million views in recent years.
In the answers below I focused on the following topics and issues:
- Have you ever seen how a successful person ruined his life? How was it?
- Is it better to be rich or wealthy?
- Is Monaco the most expensive place in the world?
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Source for all answers – Adam Fayed’s Quora page.
Is it better to be rich or wealthy?
In some situations, there is a big difference between being wealthy and rich.
It isn’t just semantics, unlike what some have said below. It is true that the media, and many people, use them interchangeably, but that doesn’t mean that they are.
Take this as an example. If you have a person making $20m a year after tax, but they spend $20m, they are rich on many measures.
There have been plenty of people in this bracket. They aren’t wealthy. If they spend $21m, they are even in negative net worth territory.
There have been countless sports and entertainment stars who fit into this category:
In comparison, you could have another person who makes 80k a year. They live in a very cheap part of the world with few taxes.
They invest 40k a year. That person will likely be wealthy by middle age, as they are investing half of their living costs every year.
The following graphic from financialtwins explains it in a simplified way:
Whilst it isn’t true that every flash person is broke or every millionaire is frugal, there is a commonality.
Unless you are earning huge bucks, you can’t build wealth quickly by being overly flashy.
As shown in the picture, the person with a negative 15,000 net worth might have a considerable income, but certainly isn’t wealthy.
Likewise, few people would see the asset rich, but income poor, old grandma as rich! There is a new expression for people like that – house poor.
That is because housing costs and bills eat the majority of their income. So, to answer your question, it is best to be both rich and wealthy, of course.
But if you need to pick between one, it is better to be wealthy than “rich” but with a negative net worth.
The sensible higher-income salaried or business person delay gratification. If you do that, it is possible to create enough cash flow to spend more over time anyway.
If a person with a high income dramatically increases spending before that has been achieved, there are always significant risks if the income dries up.
The wealthy person ultimately has something to fall back on.
Have you ever seen how a successful person ruined his life? How was it?
If you mean financial success, then many.
I knew one guy in South East Asia. He wasn’t making millions a year, but he was making hundreds of thousands after tax.
He had been making that much money for decades, including when it was dirt cheap in the 90s and early 2000s.
He was already in his 70s when I first met him in 2013. He should have been worth $10m or even $20m. Instead, he spent as he went along.
He didn’t have a gambling or alcohol problem, but he was often foolish in relationships and spending more generally.
Multiple divorces and other issues ensured that he spent as he went along.
He probably thought he could work forever. Then, business suffered, and his health declined a bit.
By his late 70s, he was close to destitute, relying on the charity of others.
Other commonalities I have witnessed are:
- You are putting all your eggs in one basket. There are plenty of formerly wealthy Zimbabweans and Venezuelans. Something can always happen in your birth country or where you currently live. People usually wait until it is too late. Look at the newest millionaire migration stats.
- A lack of liquidity. Putting all your assets in property and your business is high risk. You can’t easily access the money in an emergency.
- Leverage or debt. It is very accurate that there is good and bad debt. Leverage helps businesses grow. Real estate doesn’t usually work if it isn’t used. Buying indexes on margin can work. Yet it also increases the risk, so leverage needs to be used sensibly if you engage with it.
- Not having a proper plan if something happens to your health. This is why many people use trusts and other structures, in addition to specific insurances.
- A lack of planning for inheritance. There are many first-generation rich. There are fewer second-generation rich. Even fewer third or fourth-generation rich. Proper planning is needed if the money gets diluted due to inheritance taxes and numerous siblings.
- They have too much cash. It seems like a good problem to have, but inflation is the silent killer of wealth. In the UK, some very old people still leave money under the mattress as they don’t trust the banks. Imagine how little the money is worth today compared to when they put it there decades ago.
- Hangers on. Many former athletes go bust, and often spending habits don’t help, but having bad people around you contributes to that.
Not planning is one of the commonalities, as is not having a sensible middle ground between being too cautious or taking too many risks.
Is Monaco the most expensive place in the world?
I went to Monaco this year. Isn’t cheap, but not as expensive as Switzerland was for many everyday items.
The bus and train from Nice was only about two Euros. Cafes and restaurants weren’t all extortionate. I went to the supermarket for a drink, and most prices were fine.
What is very expensive is land prices. Renting and buying property.
There are a lot of people in a very small area, including very wealthy people. Those wealthy people are still better off, in many circumstances, in Monaco than in the UK, Australia or Canada due to taxes.
Therefore, it makes sense to spend much more on accommodation if your tax bill is hundreds of thousands (or millions) less in the case of higher earners.
That pushes up Monaco’s cost of living, but it doesn’t make it the most expensive place in the world.
Take Monaco and compare it to Geneva:
Everything is the same or cheaper in Monaco, apart from accommodation which is miles more expensive in Monaco.
So, it would be more accurate to say Monaco can be the most expensive place in the world, if you don’t compromise on accommodation.
In reality, almost everybody does compromise and trade down. Even billionaires live in apartments in Monaco.
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Adam is an internationally recognised author on financial matters, with over 735.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.