small story

Some months later we thought we'd drive by to see whether that dot-com family had moved in yet. There was a big sign out-front. Construction had stopped mid-way and the big, unfinished house was for sale. I was curious, so I dug deeper. It turns out that the dot-com IPO was valued at about $50 million, and this guy who was building the palace had sold about $3 million worth of stock during the offering, which valued his 20% stockholding at $10 million. When the stock crashed (to a fraction of the IPO price) and the company folded, his debts and commitments already exceeded the amount he had cashed in plus his stock value, and he was broke. They had made a 10% down payment on the $10 million home, and the bank was now the owner of the unfinished monstrosity. The dot-com "millionaire" was now looking for funding on his next venture. This type of escalation up the ladder of life is not limited just to the filthy-rich. I remember many years ago, a colleague at work with a salary comparable to mine had a home that seemed much larger. Perhaps he was independently wealthy. Then we both got a similar pay raise, and I heard to my amazement that he was moving to an even larger home. I asked him how he did it and he replied, "The magic of monthly payments!" A few years later, during the aerospace layoffs, I bumped into him again. He had lost his job, his wife had left him, they had sold the house during the divorce, and he was selling office supplies to make a living—a casualty of lifestyle syndrome. Our society boosts people into thinking that wealth accumulates and extrapolates endlessly. And borrowing is based on that misconception. Don't pay cash, when you can borrow and the interest is tax-deductible. When buying a car, many consider only the lease payments, not the price. If you can make the monthly payments, why not buy a boat? In reality, most assets depreciate, while expenses and liabilities (including interest) mount mercilessly. Many millionaires go bust quite quickly because they don't seem to understand these simple truths. They simply succumb to the lure of the lifestyle.