In Stop Acting Rich, I point out that only about 27% of those who live in million dollar homes have a million dollars in investable assets. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them — to fit in — and even to compete (in a neighborly way, of course). The type of home we live in and where we chose to live often takes the greatest toll on our financial wealth and from it all other perils flow. The higher the market value of a home the less productive the “owner” is in transforming his income into wealth.
The more expensive homes, the more affluent neighborhoods are a vortex of sociological forces. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service. From cars to haircuts, and from wine to watches, those living in “prestige estates” spend more. How do millionaires who live in homes valued at $300,000 to under $400,000 differ from people (millionaires and non millionaires) whose homes are in the $2 million to under $4 million category? Here are just a few examples from Stop Acting Rich (Table 2.3). Those who live in expensive homes are 7 times more likely to drive a Mercedes-Benz; 13 times more likely, a Porsche; shop at Neiman Marcus, 12 times, Sax Fifth Avenue, 9 times; and have paid over $1,000 for a suit, 44 times more likely! We take consumption cues from our neighbors. If many of our neighbors have a much higher level of income and wealth than we do, we will have set ourselves up to lose the war before we have even begun to battle.
Last week, Zac Bissonnette wrote an enlightening and entertaining article in dailyfinance.com about one of the “Real Housewives of New Jersey” and her current economic situation. According to his article, she and her husband have an $11M debt! However, if you have ever watched the program, the couple lives in what appears to be a multi-million dollar home in an exclusive New Jersey neighborhood which is within the metropolitan area of New York. Could this be just another case of “big hat, big home, no cattle (wealth)” of any kind?
Most of the self made millionaires I have studied have one thing in common: they were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth. In essence, they ran their households like a productive business. It is not only about how much you make (or generate in sales). More importantly, it is how much you keep. And the “keep” component begins and ends at your home address.