The third, and perhaps most important reason why wealth is lost is due to conspicuous consumption. The expression “conspicuous consumption” is a term that was first coined by a Norwegian economist by the name of Thorstein Veblen, in his famous book called “The Theory of the Leisure Class.” In this work, Thorstein defines conspicuous consumption as “the waste of money in order to acquire material goods for the purpose of achieving a higher status than others.” An example of conspicuous consumption is purchasing a $500,000 car purely for the prestige of owning it, despite the fact that a much cheaper car would achieve the same task.
Conspicuous consumption has become a dangerous trend in our society. Not only is it pandemic among the rich, it is also pandemic even among those who are not rich. Many middle class and even working class people often spend the little money they have on status symbols in order to appear cool, and most of these status symbols are liabilities that will decline in value over time. For instance, when I was in school, the most popular kids all wore designer clothes, and those who didn't wear them were seen as being “inferior.” Little has changed today. Those who have the latest designer clothes, electronic gizmos, and other status symbols are seen as being hip and trendy, while those who don't are seen as being archaic, backwards, and inferior.
The difference between the rich, middle class, and poor is that at least the rich can conspicuously consume for a certain period of time without destroying themselves, since after all, they are rich. However, the bulk of the population cannot afford to consume conspicuously without destroying their long term wealth. Unlike the rich, most people work for someone else, and their livelihood is dependent on them maintaining a job. If they lose their job, they lose not only their ability to conspicuously consume, but they also lose their ability to afford the basic necessities.
Even if they don't lose their job, if their consumption exceeds the amount of money they earn through their jobs, they will eventually find themselves deeply in debt. Even for the rich, conspicuous consumption can be extremely dangerous. While it is true that your income may be earned from multiple sources through positive cash flow, these streams of income can be wiped out. This is also why I highly recommend avoiding having all your cash flow and wealth concentrated in one source.
Many famous celebrities, who make millions per year, go bankrupt on a regular basis. You often hear about these individuals in the news. This is clear evidence that being rich doesn't mean that you can conspicuously consume. Regardless of how much cash flow you may bring in annually, no one has infinite wealth, and this means that there is a limit to how much you can consume. Consume too much, and regardless of whether you're a multi-millionaire or a worker at a fast food joint, you will end up in the same scenario, which is bankruptcy.
Many millionaires and even multi-millionaires lose their wealth within a single generation simply because of conspicuous consumption. Arrogance and hubris often causes them to go out and spend money on things that the economist Thorstein Veblen calls “Veblen objects,” items that increase in demand as their price increases. Some of these objects include exotic sports cars, vintage wines, rare artwork, fine jewelry, and designer clothing.
While there is nothing wrong with enjoying the wealth that you've worked hard to acquire, those who conspicuously consume will make this their primary purpose in life, and will reduce the chances of their passing down this wealth to their progeny. For these individuals, their purpose in life is to enjoy all the luxuries that life has to offer. At this point, the key question that may be going through your mind is this: What is wrong with this scenario? After all, doesn't enjoying all these luxuries make life worth living?
The answer to this question is “yes,” but the problem with conspicuous consumption is that there is a limit to how much you can spend, and ultimately, purchasing an object simply because it allows you to “appear” better than others is a bit ridiculous. After all, we're all human, and regardless of how wealthy you may be, you are still susceptible to illness, old age, and death. Ironically enough, the money that you spend on these Veblen objects can often be used to invest in more assets which would allow your wealth to grow even more. If you have children, and they develop your conspicuous spending habits, they will in all likelihood lose all or much of this wealth by the time their children become adults, if not before.
Many millionaires and high income people go bankrupt all the time because conspicuous consumption becomes a way of life to them. They shop for the purpose of shopping, even when they have everything they need at home. They purchase things in order to look better than their neighbors, when in the long run, these things don't even matter. A thousand years from now, who will care whether or not your car costs $30,000 more than that of your neighbor today. In many cases, those who conspicuously consume are wasteful. Despite the fact that millions of people around the world starve daily, these individuals have no problem wasting food. After all, they are rich, and they can always buy more. It is this type of mindset which eventually leads to a loss of wealth.
Warren Buffet, who made is first million by the age of 30, is today one of the richest men on the planet. At the age of 78, Buffet as of this writing has a net worth of approximately $37 billion. However, you would never know this by looking at his house, which he paid $31,500 for in 1957. His house is a five room property constructed with stucco, and he still lives there today. In a day and age where many A-list celebrities pay in excess of $10 million for their homes, it is astonishing to see that Buffet, a man who surpasses them all, still lives in a home that he paid little more than $30,000 for. To reach true wealth, this is a key factor that you must remember for the rest of your life. While it is your money and you can do what you wish with it, we can assure you that if you choose to use it for the sole purpose of conspicuous consumption, your life will not be a happy one.