Monday, June 25, 2012

Renting Money Versus Owning Money

Do you own money, or just rent it?

In my posting Owning Money, I put forth the proposition that money is something you should think about as owning rather than passing through your hands every month.

Owning Money is real wealth - making a lot of money and then spending it, is just upper-class poverty.  Real wealth is measured by how much money you have not how much you spend.

But most people never get this concept - and the media doesn't, either.  When the media talks about "rich people" they do so in terms of annual income not their net worth.   You can be a Millionaire, and yet make less than $50,000 a year.  And I'm living proof of that.  By the media's standards, I am dirt poor.  Yet by measure of real wealth, I am in the top 3% for the nation.  Go Figure.

One way to end up income-rich and wealth-poor is to spend a lot of your income renting money. 

The concept of renting money, of course, would seem alien to most people - yet most people do it.   Yes, when you borrow money, you are, in effect, renting it.   Like an apartment that you rent, you never own it outright.  You merely have the right to use it.   You pay a monthly rent (interest) and then have the right to use the place.  When you vacate, well, you have to give the apartment back (pay the principal).   You never own anything, but pay extra for the right to use it.

Borrowing money is basically renting it for a fee.  You get the money, to be sure, but you have to give it all back, plus interest (your rent) on top of that.   So you can see, it is more expensive to rent money than to own it outright.

Because if you own money you can do fun things - like rent it out to other people, and make money that way.  It is a pretty sweet deal, as you basically use money to make money.  The chump paying rent, on the other hand, is just squandering what little he has, so he can pretend to own something for a while.

This is a profound shift in philosophy, if you think about it - and most of us don't want to think about it.  We are trained from birth to think of money as something "other people have" - rich people, not us.  So we don't bother trying to accumulate it, and in fact, resign ourselves to a life of perpetual money renting as we think this is all we deserve.

For the very poor, this mean renting money all the time - even for minor purchases.   A friend of mine needed a new dishwasher recently.   I told him that what I do, is look on Craigslist or in the local Pennysaver to find someone who is moving, who is selling a used machine a couple of years old, and then pay cash for it.  Maybe $100 gets you a nice working machine.

He looked at me like I was from planet Mars.   And, of course, he went out, bought a brand-new machine for $599 and financed it at 21% interest.  And why did he do this?  Because throughout his life, he financed nearly everything he owned.  No purchase was too small to put "on time" or on a credit card, to be paid off in increments, plus interest.

And this, to him, seemed as natural as breathing.

But it is not.  And if you want to accumulate wealth you have to break free of this mindset.  Some folks do, and we get mad at them and call them the evil 1%ers - or use ethnic slurs.  How is it "those people" are so smart with money and make so much, while we struggle to make payments?

Simple - they are the ones loaning us the money.  They respect money - they understand money - and they don't rent money unless it makes business sense to do so, such as investing in a business that will pay back the rented money with interest.

Only stupid consumers rent money to buy consumer goods which are worth less and less with each passing day.  Only consumers fail to "get it" with regard to money, and think that borrowing is a privilege and moreover a way of life.

There are a few things in life that are worth renting money for.   Getting an education - provided it is not overpriced and worthless.  Buying a house - that costs less to own than it would to rent.   Investing in a business, such as a rental property or your own company - provided it will make enough profit to pay back the loan and interest and leave a profit leftover for you.

Money-making enterprises are worth renting money for.  Buying crap for yourself, isn't.

Avoid renting money when you don't have to.

And think about borrowing in terms of renting money - it will seem a lot less attractive when you put it that way.

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