When we're born into this world, we don't have a clue what money is. Thus, we all start out with a financial disconnect that's due to a lack of awareness. But, over time we're taught the value of money as well as financial awareness.
But even as adults, some people still suffer from financial disconnect. Some people waste their money away yet still criticize how other people spend theirs. Others think only their way to invest is the right way, and the way everyone else invests is wrong. When it comes to money and people, financial disconnect abounds.
I thought about this recently with an interaction I had with a friend of mine. One of my new favorite restaurants in San Francisco is Espestus Churrascaria. The restaurant serves good old fashion Brazilian meat that is more tasty than some of the finest dry-aged rib-eyes. Ever since visiting Rio de Janeiro in 2006 during business school, I've been craving to eat some Picanha (rump cap) until finally my best friend took me to Espestus last month.
Financial Disconnect Abounds
After going without picanha for eight years, I wanted to return just a month later. Perhaps one of the main reasons why I never went was because of the cost. At $74 a person after tax and tip for food alone, Espestus costs a pretty penny!
Instead of just going with my friend the second time around, I asked her if she'd like to invite another couple friend of ours to make it four.
Here's her friend's text response: Too expensive!
Espetus is surely an expensive place to eat, but our friends are in their late 30s, rent a $3,700 a month apartment and drive a 2010 Porsche Cayenne. The husband also has a $10,000 motorbike.
Here's my text response to my friend: Ask them anyway. They drive a Porsche that costs literally 15X more than Moose!
She texts back: OK, I'll see.
Who Is Out Of Touch With Financial Reality?
My friend knows this couple better than I do. I'm absolutely sure the husband makes more money than my friend given he's seven years older and is a hardware engineer in Silicon Valley. His wife is currently working part-time in retail, so probably doesn't make too much. Perhaps my friend was just thinking of her instead of looking at their entire financial package. My friend is a very frugal and kind person.
I'm a very analytical person when it comes to assessing someone's finances. I've got a couple triggers that get processed instantaneously. If I see someone driving a $40,000 Porsche Cayenne (he bought it used), I automatically assume the driver makes at least $200,000, if not $400,000 based on my 1/10th rule for car buying.
As a landlord, if I know someone pays $3,700 a month in rent, I assume they make at least $148,000 a year because 40X the monthly rent as annual income is the minimum I accept for tenants (See Pricing Strategy To Maximize Rent). I'm sure many of you have your own quick assumptions about others as well.
Surely a couple who makes $148,000 – $400,000 a year in combined income can afford a $150 dinner for two, no? Putting the situation this way, my friend agreed she didn't think things through. However, she still feels bad asking them to go with us to Espetus Churrascaria for a face-stuffing good time, so she never asked.
Is my friend showing financial disconnect, or am I being financially aware?
Be Careful With The Things You Own
The truth of the matter is, my friend is more right than wrong. It's unlikely the couple have a lot of savings given the old company the husband worked for went under. The wife has been out of steady work for two years and $3,700 a month in rent for a one bedroom is expensive. They just like their toys. Good on them for spending on what brings them happiness. They are a very generous couple who are very fun to be around – hence, why I asked my friend to invite them in the first place.
I've just got different financial values than them. For example, I personally would never spend more than $2,000 a month on rent. The day I needed to was the day I bought my first SF property back in 2003. Because they do spend so much on rent, I automatically think they are decently wealthy. Therefore, I assumed they can spend freely on food, which is something I don't mind paying up for.
The things you own allow your friends to paint a financial picture of who you are. I always want to anchor low so that I have the choice to spend up if desired. To anchor high would surely be bad for my finances as I'd hang around with wealthy people who think nothing of $75 dinners, $200 shows, $500 hotel rooms, and $8,000 business class tickets overseas.
They would automatically assume that I can afford everything because of my things. If I show any unwillingness to pay, then I'll be deemed as “cheap.” And there's little I find more annoying than when rich people call me cheap.
Turn Financial Disconnect Into Financial Awareness
I encourage everyone to err on the conservative side of spending on things which can be seen by others. When I owned a used BMW M3 coupe as a 27 year old, I wanted to naturally buy a fancy racing watch like the stainless steel Rolex Daytona ($10,000 back then).
Now that I drive a 14 year old Land Rover, I'm just happy if my dashboard clock doesn't go out! Spending begets more spending thanks to your own desires, and thanks to the assumptions made by others. It's not someone's fault for thinking you make more than you really do when you've got a lot of fancy toys.
Avoid the negative spending trap as much as possible if you want to grow your wealth. And if you're already wealthy, well then don't forget to treat your less wealthy friends out for all-you-can-eat picanha!
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Readers, is my friend showing tremendous financial awareness or financial disconnect by saying the couple can't afford to eat with us? Am I overly simplistic in my financial assumption of others because I believe everybody is rational? How do you balance going out with friends who have much different financial wealth than you? Do you think it's natural for other people to guesstimate your financial health based on the things you own?