Meet the Millionaire Next Door
These people don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires. Where are the millionaires who look like millionaires?
Wealthy, affluent or rich are not defined in terms of material possessions. Being wealthy is defined in terms of Net worth. A person’s income and age are strong determinants of how much that person should be worth.
How to determine if you’re wealthy: Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
Given your age and income if you are In the top quartile for wealth accumulation, you are a PAW (Prodigious accumulator of wealth). If you are in the bottom quartile, you are a UAW (Under accumulator of wealth).
Frugal Frugal Frugal
They Live well below their means
A FOUNDATION FOR BUILDING WEALTH: Being Frugal.
Webster’s defines frugal as “behaviour characterized by or reflecting economy in the use of resources. The opposite of frugal is wasteful. Being frugal is the cornerstone of wealth building.
PLAYING GREAT DEFENCE: The affluent tend to answer “yes” to the questions we include in our surveys:
- Were your parents very frugal?
- Are you frugal?
- Is your spouse more frugal than you are?
The last question is highly significant. Not only are the most prodigious accumulator of wealth frugal, their spouses tend to be even more frugal. Nearly 95% of millionaire households are composed of married couples. In 70% of these households, the male contributes at least 80% of the income. Most of these men play a great offence in the game called income generation.
Millionaires became Millionaires by budgeting and controlling expenses, and they maintain their alliance status the same way.
Question 1: Does your household operate on an Annual Budget?
Millionaires create an artificial economic environment of scarcity for themselves and the other members of their household. More than half of the nonbudgeters interest first and spend the balance of their income. Many call this the “pay yourself first” strategy. These people invest a minimum of 15% of their annual realized income before they pay the sellers of their food, clothes, homes, credit and the like.
Question 2: Do you know how much your family spend each year for food, clothing, and Shelter?
Almost 2/3 of the millionaires (62.5%) answered “yes” to this question.
Question 3: Do you have a clearly defined set of Daily, Weekly, Monthly, Annual and Lifetime Goals?
For every 100 millionaires who answered ‘No’ to this question, there are 180 who answered ‘Yes’.
Those who answered ‘No’ are high income and inherited wealth type and many senior citizens and retired millionaires who have already reached most of their goals.
Financially independent people are happier than those in their same income/age cohort who are not financially secure.
Financially independent people seem to better visualise the future benefits of defining their goals
Question 4: Do you spend a lot of time planing your financial future?
For every 100 millionaires who answered ‘No’ to this question, there are 192 who answered ‘Yes’.
Those who answered ‘No’ are high income and inherited wealth type and many senior citizens and retired millionaires who have already reached most of their goals.
On average, millionaires spend significantly more hours per month studying and planning their future investment decisions, as well as managing their current investments, than high income millionaires.
THE ULTIMATE CONSUMPTION CATEGORY
The typical Millionaire in our surveys has a total annual realized income of less than 7% of his wealth. This means that less than 7% of his wealth is subject to some form of income tax. Millionaires know that the more they spend, the more they must realize. Therefore, realize
To build wealth, minimize your resources (Taxable) income and maximize your unrealized income (wealth/ capital appreciation without a cash flow)
Most millionaires measure their success by their net worth, not by their realised income.
If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.
Time, Energy and Money
They allocate their time, energy, and money efficiently in ways conducive to building wealth
Efficiency is one of the most important components of wealth accumulation. Simply: People who become wealthy allocate their time, energy and money in ways consistent with enhancing their net worth.
PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do.
There is a strong positive correlation between investment planning and wealth accumulation.
UAWs spend more time worrying about these issues than taking proactive steps to change their tendencies to over-consume and under-invest.
Planning and Controlling
Planning and Controlling consumption are key factors underlying wealth accumulation. Operating a household without a budget is akin to operating a business without a plan, without goals and without direction.
The Home Team
Do you know exactly how much your family spent last year for each and every category of Product and Services? Without such knowledge, it’s difficult to control your spending. If you can’t control your spending, you’re unlikely to accumulate prodigious amounts of wealth. A good start is to keep an accurate record of each and every expenditure that your family makes each month.
Financial Goals: Words versus Deeds
Many High-Income-producing PAWs and UAWs share similarly stated goals concerning wealth accumulation. For Example, more than three fourths of both groups indicated they had the following goals:
- To Become wealthy by the time they retire
- To increase their wealth
- To become wealthy through capital appreciation
- To build their capital while conserving the value of their assets
But having a set of stated goals does not necessarily mean that one is committed to achieving them. Most of us want to be wealthy, but most of us do not spend the time, energy and money required to enhance our chances of realizing this goal.
Time Allocation:
Most PAWs agree with the following statements, while most UAWs disagree:
- I spend a lot of time planning my financial future.
- Usually, I have sufficient time to handle my investment properly
- When it comes to the allocation of my time, I place the management of my own assets before my other activities.
Conversely, UAWs tend to agree with the following statements:
- I can’t devote enough time to my investment decisions
- I’m just too busy to spend much time with my own financial affairs.
Planning and Wealth Accumulation are significant correlates even among investors and modest incomes.
Active or Inactive Trader?
Nearly all (95%) of the millionaires we surveyed own stocks; most have 20% or more of their wealth in publicly traded stocks. Yet you would be wrong to assume that these millionaires actively trade their stocks. Most don’t follow the ups and downs of the market day by day.
You aren’t what you Drive
They believe that financial independence is more important than displaying high social status.
If you Goal is to become financially secure, you’ll likely attain it…. but if your motive is to make money to spend money on the good life,…. you’re never gonna make it.
Many people who never achieve financial independence have a much different set of beliefs. These people work to spend, not to achieve or become financially independent. UAWs view life as a series of trade-ups from one level of luxury to the next.
So who enjoys working? Who really gets satisfaction from their careers, PAWs or UAWs? In most of the cases PAWs love working, while a large proportion of UAWs work because they ned to support their conspicuous consumption habit.
Money should never change one’s values… Making Money is only a report card. It’s a way to tell how you’re doing.
Building wealth should not change your lifestyle. Many status artifacts can be a burden, if not an impediment, to becoming financially independent. Life has its own burdens. Why add excess baggage.
Economic Outpatient Care
Their Parents did not provide economic outpatient care
Economic Outpatient Care (EOC) refers to the substantial economic gifs and “acts of kindness” some parents give their adult children and grandchildren.
Many of today’s distributors of EOC demonstrated significant skill at accumulating wealth earlier in their lives. They are generally frugal with regard to their own consumption and lifestyle. But some are clearly not frugal when it comes to providing their children and grandchildren with “acts of kindness”. There parents feel compelled, even obligated, to providing economic support for their adult children and their families.
In General, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.
Distributors of EOC often conclude that their adult children could not maintain a middle- or upper-middle-class high-consumption lifestyle without being subsidized.
The consumers of EOC are living proof of one simple rule regarding EOC: It is much easier to spend other people’s money than dollars that are self-generated.
Distributors of EOC fails to realize that such activity of providing EOC has more drawbacks than does self-sufficiency, even if that means accepting a less affluent lifestyle.
Adults who sit around waiting for the next dose of Economic Outpatient Care typically are not very productive.
Gift receivers ….the adult children of the affluent feel that their parents’ wealth/capital is their income….income to be spent and they are never able to distinguish between their wealth and the wealth of their Gift giving parents.
Gift Receivers are significantly more dependent on Credit than are non-receivers.
Gift Receivers invest much less money than do non-receivers.
Jobs: Millionaires Versus Heirs
They chose the Right Occupation
Teach your Children to Fish
Teach your children how to overcome their weakness by strengthening the areas they are lacking and not try to avoid it by putting in extra dollars.
The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more. This is a statistically proven relationship.
People often attempt to shelter their children from the economic realities of life. But such shelters often produce adults who are in constant fear of tomorrow.
The Products of Zero EOC
Webster’s defines courage as “mental or moral strength to resist opposition, danger, or hardship.” It implies firmness of mind and will in the face of danger or extreme difficulty. Courage can be developed. But it cannot be nurtured in an environment that eliminates all risks, all difficulty, all dangers.
To instill courage in the children we suggest that children be exposed to the sales profession. Encourage children to run for class office in their elementary or high school. Retail sales jobs provide another way for children to be evaluated by very objective third parties.
Affirmative Action, Family Style
THEIR ADULD CHILDREN ARE ECONOMICALLY SELF-SUFFICIENT.
Rules for Affluent Parents and Production Children
- Never tell children that their parents are wealthy
- No matter how wealthy you are, teach your children discipline and frugality.
- Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, and adult lifestyle and profession.
- Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
- Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
- Stay out of your adult children’s family matters
- Don’t try to compete with your children.
- Always remember that your children are individuals.
- Emphasize your children’s achievements, no matter how small, not their or your symbols of success.
- Tell your children that there are a lot of things more valuable than money.
Find Your Niche
THEY ARE PROFICIENT IN TARGETING MARKET OPPORTUNITIES
Why is it that you’re not wealthy? Perhaps it’s because you are not pursuing opportunities that exist in the marketplace. There are significant business opportunities for those who target the affluent, the children of the affluent, and the widows and widowers of the affluent. Very often those who supply the affluent become wealthy themselves.
BUSINESSES AND PROFESSIONALS LIKELY TO BENEFIT FROM THE AFFLUENT
There are many. Those who are specialists in solving the problems of the affluent and their heirs should be in great demand during the next twenty years.