Dallin H. Oaks tells a story I enjoy about two men who formed a partnership to sell watermelons. They obtained a truck and paid a farmer $1 each for enough melons to fill it up. Then they drove the truck to a stand they had built by the side of a busy road where they sold the truckload of watermelons for $1 each.
They went back to the farmer and purchased another truckload of melons for $1 each and again sold them for $1 each. As they drove to purchase the third load of melons one of the partners said to the other, “We’re not making much money on this business, are we?” “No, we’re not,” his partner replied. “Do you think we need a bigger truck?”
Below is a short 1 minute video that tells this story.
This story is funny because it is no ridiculous. We can’t imagine real people being this foolish. And yet Thomas J. Stanley and William D. Danko, who spent years studying wealthy Americans, would probably not be shocked by the irrational behavior of the businessmen in our story.
In their fabulous book The Millionaire Next Door, Stanley and Danko describe how many high-earners, like our hapless business partners, fail to correctly identify their problem. Speaking of these high-income, low-net worth people they write:
“They assume that by focusing their energy on generating high incomes, they will automatically become affluent. They play excellent offense in this regard. Most are positioned in the top 3 or 4 percent of the income distribution for all U.S. households. Most look the part of millionaires. Yet they are not wealthy. They play lousy defense.” They conclude, “It’s much easier in America to earn a lot than it is to accumulate wealth.”
Figuratively, the people Stanley and Danko are describing believe bigger trucks – more income – will solve their problems, so they put all their focus on making more money and none of it on controlling expenses. The result is they make a lot but spend virtually all of it not only on bigger trucks, but also bigger houses and more expensive cars and vacations. A lot of money passes through their hands but they have very little to show for it.
If you’re not making progress financially the first step is to correctly identify the problem. If you are already controlling your spending a bigger truck – more income – might be the solution. However, if you make more than enough to cover your needs, but spend it all, a bigger truck will probably not help. In that situation a plan to control your spending should be your first step.
As with the foolish business partners our minds seem to automatically default to the position that making more money is the solution to any financial problem. As the story illustrates this is not always the case. To avoid making a foolish mistake take the time to correctly diagnose your money problems before trying to solve them.