Nine Traditional Wealth Lessons
Lesson #1: Does Income equal wealth?
While higher-income households tend to have more wealth than lower and middle-income households, the size of a paycheck explains only 30% of the variation of wealth among households. What really matters are how much of the income is invested, if you have multiple streams of income and how you choose to invest. On average, millionaires invest nearly 20% of their income.
Lesson #2: Should I Budget?
The majority of millionaires have a budget they are committed to. Of those who don’t have an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it.
As for those who do budget and plan out their expenses for the coming year, no, they don’t enjoy it any more than the rest of us. Yes, they do appreciate the “payoff,” as well as fear the consequences of not doing it. It’s much easier to budget if you visualize the long-term benefits of this action.
Lesson #3: Do I Know Where My Money Goes?
Similar to the previous point, almost two-thirds of millionaires can answer “yes” to this question: “Do you know how much your family spends each year for food, clothing, and shelter?” In contrast, only 35% of high-income non-millionaires answered yes to this question. Millionaires are more likely to track their spending.
Lesson #4: Where Do I Want My Money To Go?
Another two-thirds of millionaires answered “yes” to this question: “Do you have a clearly defined set of daily, weekly, monthly, annual, and lifetime goals?” One example: a woman who wants to have $5 million by the age of 46, at which point she offer a hand up to other entrepreneurs. At the time of this articles publication, she had already reached millionaire status on an annual income of $100,000. As for those who answered “no” to the question, many of them are retired and have already reached their goal of financial independence.
Lesson #5: Is Time Money?
All this budgeting and goal setting takes time, but millionaires are willing to make the time. Prodigious accumulators of wealth spend nearly twice as many hours per month planning their investments as under accumulators of wealth. The majority of PAWs agreed with the following statements, while the majority of UAWs did not:
“I spend a lot of time planning my financial future.”
“Usually, I have sufficient time to handle my investments properly.”
“When it comes to the allocation of my time, I place the management of my assets before my other activities.”
You don’t have to earn a big six-figure salary for planning to pay off. In a survey of 854 middle-income workers, Danko and Stanley found “a strong positive correlation” between investment planning and wealth accumulation. This extra planning doesn’t just happen. According to the authors, “Most PAWs have a regimented planning schedule. Each week, each month, each year, they plan their investments.”
Lesson #6: Why Should I Love My Home?
Your choice of home and how often you choose a new one will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of millionaires have lived in the same house for more than 20 years.
In Stop Acting Rich, Thomas Stanley digs deeper into how your address affects your spending, writing:
Nothing has a greater impact on your wealth and your consumption than your choices of house and neighborhood. If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised…. People who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.
He cites several statistics to back this up, including:
Ninety percent of millionaires live in homes valued below $1 million; 28.3% live in homes valued at $300,000 or less.
On average, millionaires have a mortgage that is less than one-third of the value of their homes.
If you really want to reduce your housing bill, join the 67,000 millionaires who live in mobile homes.
If you’re looking to buy a home, Stanley provides this advice: “The market value of the home you purchase should be less than three times your household’s total annual realized income.”
Note: J.D.’s real millionaire next door has been in the same house for fifty years.
Lesson #7: Why Is Important To Love The One You’re With?
The majorities of wealthy people are married and stay married to the same person. Of course, marriage shouldn’t be just about money. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced.
It’s important to marry someone with the right financial habits. In the majority of millionaire households studied by Danko and Stanley, the husband is the main breadwinner and tends to be frugal, but the wife is even more frugal. As they wrote, “A couple cannot accumulate wealth if one of its members is a hyper consumer.”
Lesson #8: Am I Driving Away Wealth?
The majority of millionaires own their cars rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles. What is the most popular car maker among millionaires, according to Stop Acting Rich? Toyota.
So who’s driving all those BMWs and Mercedes? Not millionaires. Non-millionaires purchase Eighty-six percent of “prestige/luxury” cars. In fact, Stanley writes “one in three people who traded in their old car for a new one were upside down and owed more on the trade-in than its market value.” It’s tough to get wealthy making decisions like this.
Lesson #9: Are The Wealthy Really Happier?
At this point, you might be wondering whether all this living below your means is worth it. Sure, millionaires having bigger portfolios but are they happier? Danko and Stanley’s research indicates that they are. According to their research, “Financially independent people are happier than those in their same income/age cohort who are not financially secure.”
First of all, PAWs worry less than UAWs. There’s a peace of mind that comes from living below your means and having money in the bank. But they also don’t expect “status” purchases to improve their happiness, because evidence shows it doesn’t happen. Among the people surveyed, those who drive a BMW and wear a Rolex are not happier than those who drive a Honda and wear a Timex.
The Double-sided Benefits of Living Below Your Means
After reading these books, it occurred to me that there are actually two benefits of learning to live on much less than your paycheck.
The first, of course, is that you can save more.
But secondly, it also means that you ultimately need to save less.
Permit me to demonstrate.
Someone who makes $50,000 but lives on just $40,000 can contribute $10,000 a year to her nest egg, and can retire when that nest egg is big enough to generate along with Social Security and other benefits $40,000 a year. However, someone who makes $50,000 but spends, say, $48,000 is contributing just $2,000 to a portfolio that must eventually help provide $48,000 a year in retirement. In other words, she’s saving less yet needs to accumulate more.
Thus, when it comes to retirement planning, adopting the lifestyle of the “millionaire next door” means you can save more toward a lower-priced goal. That’s a formula that can help even non-millionaires achieve their retirement goals.
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