Yes, people who make more money have more wealth than lower- and middle-income households, but the size of a paycheck only explains 30% of the differences of the rich and poor. What really matters is how much of your income is invested. Millionaires invest nearly 20% of their income.
Authors of the book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, Danko and Stanley offer a formula for determining whether you have a net worth that is commensurate with your income:
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be.
The authors rightly call it a “simple rule of thumb”; for those in their mid-40s and later would meet this metric, were they to save 10% to 15% of their incomes throughout their careers, or started later but saved 20% to 25% of their incomes. This may not be common, but it’s not impossible.
2. Know where your dough goes
The majority of millionaires have a budget, and they tend to invest a good chunk of their income before they spend any of it.
Millionaires are more likely to track their spending. 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.
Most millionaires also have a clearly defined set of daily, weekly, monthly, annual, and lifetime goals
3. Home is where the heart is–stay in yours for a while
Your choice of home — and how often you choose a new one — will determine your ability to accumulate wealth. Half of all 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:
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.
The majority of wealthy people are married and stay married to the same person. Of course, marriage shouldn’t be just about money. We’re sure that 24-year-old Crystal Harris has other reasons for being engaged to 84-year-old Hugh Hefner; perhaps she loves his pipe. But several studies have shown that people who are married accumulate more wealth than those who are single or divorced.
However, 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 hyperconsumer.”
5. Don’t show your wealth on four wheels
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-es? Not millionaires. Eighty-six percent of “prestige/luxury” cars are bought by non-millionaires. In fact, Stanley writes that “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 doing stuff like that.
Bonus: The Rich Are Different — They’re 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, millionaires worry less. 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.
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