I just finished reading the ebook “The Millionaire Next Door” written by Thomas J. Stanley and Willam D. Danko where they conducted a research case study and surveyed American Millionaires.
Who becomes wealthy? What do they do? How did they become millionaires? Or you can ask yourself, “Can I ever become one of them?”
In their case study, usually the wealthy and millionaires are businessmen who have lived in the same town for all their adult life. They have married once and remained married. They lived next door to people with a fraction of their wealth. They are a compulsive saver and investor. And they have made their money on their own.
Based on their research study, they came up with seven factors of becoming wealthy millionaires:
Millionaires live well below their means. Looks can be deceiving but millionaires wear inexpensive suits and drive American-made cars. Only a minority of millionaires drives the current-model-year automobiles. Only a minority of them ever leases their motor vehicles.
Millionaires are frugal individuals. Being frugal is the cornerstone in wealth building. Yet, however, oftentimes, the big spenders are on the spotlight of press people. We are oftentimes compelled by media to spend more because the rich and the wealthy in terms of lavish lifestyle are the ones promoted and sensationalized by the press.
Millionaires tend to answer, “yes” to these three questions that the authors included in their survey. Were your parents frugal? Are you frugal? Is your spouse more frugal than you are?
Millionaires allocate their time, energy, and money efficiently, in ways conducive to building wealth. Millionaires are fastidious investors. On average, millionaires invest nearly 20% of their household realized income each year. Most of them invest at least 15 percent. Seventy-nine percent of them have at least one account with a brokerage company. But they make their own investment decisions.
Millionaires hold 20% of their household’s wealth in transaction securities such as publicly traded stocks and mutual funds. But they rarely sell their equity investments. They hold even more in their pension plans. On average, 21% of their household’s wealth are in their private businesses.
Millionaires have goals. They are goal-oriented persons. They have goals for themselves and their children. They want to be financially secure and they know how much they need to set aside for that specific goal. But you may ask, are they happy? According to their research, yes, they are happy. Financially independent people are happier than those in their same income/age bracket who are not financially secure. They seem to be better able to visualize the future benefits of defining their goals. They spend a lot of time planning their financial future.
Millionaires believe that financial independence is more important than displaying high social status. Most millionaires redefine the definition of wealthy. Traditionally found in dictionaries, wealthy or millionaires refer to people who have an abundance of material possessions. They do not define wealthy or rich in terms of material possessions. They claimed that many people who display a high social status have little or no investments, appreciable assets, income-producing assets, stocks, and bonds. Conversely, those people who truly are considered as millionaires get much more pleasure from owning substantial amounts of appreciable assets than from displaying high social status lifestyle. As they have said, “you aren’t what you drive.”
Millionaires’ parents did not provide economic outpatient care. Most millionaires are first generation rich. They have confidence in their own abilities. They do not spend time worrying about whether or not their parents were wealthy. They do not believe that one must be born wealthy in order to be wealthy. They claim that people of modest backgrounds who believe that only wealthy produce millionaires are predetermined to remain non-affluent. In general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more. People who sit around waiting for the next dose of economic outpatient care are typically not productive.
Millionaires’ adult children are economically self-sufficient. Millionaires believe that education is extremely important for themselves, their children and grandchildren. They spend heavily for the education of their children.
Millionaires teach their children to fish. As a group, millionaires feel that their daughters are more financially handicapped than their sons. Men seem to make more money even within the same occupational categories. That is why most millionaires would not hesitate to share some of their wealth with their daughters. Men, generally according to them, should not need subsidies from their parents.
Millionaires are proficient in targeting market opportunities. Millionaires minimize their tax bills by investing heavily in tax free municiples, tax-sheltered real estate, and stocks with unrealized gains.
Millionaires know that the more they spend, the more income they must realize. The more they realize, the more they must allocate to some form of income tax. So millionaires adhere to an important rule and that is, to build wealth, minimize your realized taxable income your unrealized income. This is very similar to my previous article about secrets of the rich. That is to minimize active income and maximize passive income since active income is more taxed than passive income.
The authors have also devised a rule with regards to purchasing real estate and that is, 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. Living in less costly areas can enable you to spend less and to invest more of your income. Added to this, you will pay less for your property taxes.
Millionaires chose the right occupation. Most millionaires recommend accounting and law to their children. These are the ideal occupations for their sons and daughters. They said that the number of millionaires is growing much faster than the general population and that their kids should consider providing affluent people with some valuable service. Tax advisors and estate-planning experts will be in a big demand in the future that’s why they chose these fields for their children.
Millionaires also encourage their children to become self-employed professionals such as physicians, attorneys, engineers, architects, accountants, and dentists. They know the risks and the odds of succeeding or failing in a business. They also understand that only a small minority of self-employed professionals fail to make profit in any given year, and that the profitability of most professional service firms is substantially higher than the average for small businesses in general. These professionals sell their intellect and these are all portable assets. Physicians, for example, can take their intellect anywhere in the world.
How to determine if you’re wealthy?
The authors have devised a simple rule of thumb. No matter what is your age and how huge your income is, the wealth equation should be:
Multiply your age times your realized pretax annual household income from all sources except inheritance. Divide it by ten. This, less any inherited wealth is what your networth should be.
So if a highly skilled 30-year old athlete who gets paid, say for example, $5 million per year, having $1 million net worth is definitely not a big deal. In fact based on the wealth equation above, he should have a net worth of $15 million or more.
At the end of their research study, they found out what it takes to become a millionaire. Mainly, that becoming a millionaire takes discipline, sacrifice, and hard work.
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