This week we do a case study on what a ‘rich’ and a ‘wealthy’ household looks like. You might think they are the same but they are worlds apart. If you haven’t seen our Rich vs. Wealthy principles episode, click here.
A quick recap:
A rich household is most households in NZ. These are households who have started to get better jobs, make better salaries or wages but spend everything they earn. They buy plenty of lifestyle assets, try to keep up with their friends, believe they earn too much to budget and have no plans for the future.
A wealthy household tries to minimise their 4 walls cost as much as possible because they understand money. They know expenses and liabilities take money out of their pocket and instead put money into income generating assets. They have a plan for their future and take small consistent steps to achieve their goals.
Rich household
| Current financial position | |
| Household income | $500,000 |
| Owner-occupied home – Glendowie | $2,500,000 |
| Owner-occupied mortgage | $1,500,000 |
| KiwiSaver – bank, default fund choice | $100,000 |
| 2x Vehicles | $300,000 |
| 2x Jetskis | $40,000 |
| Credit card – $20,000 limit | $10,000 |
| Private school fees | $50,000 |
Let’s look at their goals.
This couple currently live in Glendowie, Auckland and are looking to move to Parnell, Auckland which will cost them $4,000,000. They want to buy a holiday home on Waiheke Island in 5 years, which will cost them $1,500,000. They want their 2 kids to go to private schools, which costs $25,000 per year, per child for around 7 years.
Let’s project their financial position when they 65.
They have been forced to work until 65 because they have invested completely into lifestyle assets. They have not been able to pay off their mortgage with $1,000,000 of debt going into retirement. They don’t want to downsize because they are worried about what their friends will think.
They have around $1,700,000 in KiwiSaver combined between the two of them (due to their high incomes). However, due to their lifestyle they spend it all before they turn 80. They can’t help their kids into their first home and leave nothing for future generations.
We often see quite a lot of social pressure in these situations, the pressure to keep up with people on Instagram, keeping up with friends etc. That social pressure coupled with no delayed gratification and understanding of money has meant they spend faster than they earn. Great lifestyle but unfortunately not sustainable.
Wealthy household
| Current financial position | |
| Household Income | $300,000 |
| Owner-occupied home – Glen Innes | $1,500,000 |
| Owner-occupied mortgage | $1,000,000 |
| KiwiSaver – Milford Aggressive Fund | $100,000 |
| 2x Vehicles | $100,000 |
Let’s look at their goals:
They like their jobs but want some financial freedom. They want to have the option of working in the future, not because they have to but because they want to. They also want to help their kids into their first home.
To achieve these goals they talked to a financial advisor. They created a budget, made an active choice in their KiwiSaver and decided to use a bit of equity in their home to purchase an investment property.
Once, they purchase their investment property, they focus on paying down their owner-occupier debt. They pay their mortgage off by age 43. They then use the surplus cash to contribute to managed funds.
At 50, they’ve got $800,00 in managed funds. They sell the investment property at 55, which they have held for 13 years and put the proceeds into a managed fund, which gives them $2,000,000 in total.
Despite retiring at 55, their KiwiSavers are still worth $1,800,000 by the time they’re 65. This allows them to live on a $100,000 annual income for the rest of their lives and give each of their kids $100,000 to help them buy their first home. At 100 they still have $1,650,000 in capital, which sets a legacy for their kids and their grandchildren.
The wealthy couple end with more in their retirement account by age 65, even though they only earned 60% of the rich couple. They were able to help their kids with buying a home and left a healthy inherence for their family too.
What are the lessons?
Without a clear plan and consistent action, you will never get the chance to stop working.
While instant gratification feels good in the moment, frivolous spending deprives you of the effects of compounding appreciation and costs you more money in maintenance or repairs.
Strike a healthy balance between living in the moment and planning for the future, you can sacrifice a little now, or a lot later.
