Letter to my children: Rich vs Wealthy

Dearest Beloveds, as the two of you navigate the world of capitalism and your own want monsters - I want to reiterate a thought.

I just read Morgan Housel’s The Psychology of Money:Timeless lessons on wealth, greed, and happiness. My key takeaways are threefold:

#1 Compounding interest does its magic only if you give it enough time.

#2 The unexpected will happen and your life goals will shift.

#3 It is preferable to be wealthy than rich.

All three of these are important to grok as you grow. The first is a satisfying mathematical fact. The second is common sense.* It is the last nugget I want to expand.

Housel gives a nice historical snapshot in his book for what happened in this country post WWII. The frugality of the Depression/wartime was swept aside with rising wages and consumer spending. The economy boomed with consumption and more consumption (a vacuum and fridge in every home). Then the 70s hit with the gas crisis and wages stagnated (though not for those at the top of the income bracket) yet people kept consuming - paid for by interest bearing debt.

Debt masks whether someone is rich or wealthy. Rich is outwardly obvious whereas wealthy is not. Rich is the sparkle of diamonds, the gleam of the Maserati, the speed of the private jet, or the glistening bowls of caviar. Wealthy is having a dollar in your pocket and choosing to save it for later. For some undreamed of opportunity that will be possible because it wasn’t spent. Or the dollar (and its friends, remembering compound interest) can be spent to mitigate an unimagined disaster. Wealthy brings ease. Rich brings stuff, stuff that often costs more cash to babysit.**

I will say this now and I will say this again (and again). If you have a choice in life - choose wealth over riches. ***

Wealth is a mindset. Riches is a means of competition and feeding the Cranky Monster (in his guise of the Want Monster). Stuff will not make you happy - despite pronouncements from those tasked with selling it.

* Nobody expects the Spanish Inquisition (thank you Monty Python.)

** E.g., a new Rolex is $4k and it costs $1200/8-10 years to service it. There are carrying costs to having rich things. Insurance, cleaning, maintenance, etc.

*** The Federal Reserve publishes information one can study demarcating income levels and percentiles. The data can be used for comparisons and historical trends - like the one below. People can argue over what percentile level qualifies as rich. I would argue that wealthy is attainable for all those on the table whose income can cover basic necessities. Good old Maslow’s Hierarchy of Needs.