For years I have clipped articles out of magazines that interest me. The really good ones I keep in a file in my desk. Well, a couple of Saturdays ago, I went through my file; it’s old and tattered, to say the least. I came across an article I cut out of Reader’s Digest in 1992. It was a summary Reader’s Digest had done on an article written by Thomas Stanley in Medical Economics. Stanley is the author of The Millionaire Next Door and The Millionaire Mind, two of my favorite books. By the way, they are books you ought to read and have your kids read. Anyway, I have reprinted the story in its entirety right here; please take a few moments to read it.
How to Live Like a Millionaire
Twenty years ago, I began studying how people become millionaires. Surveying residents of posh neighborhoods across the country, I discovered something odd. Many who live in expensive homes and drive luxury cars don’t have much wealth. They may earn a fair amount of money, but they spend it all.
Then I discovered something even odder: many who have a great deal of wealth don’t live in posh neighborhoods. In one large metropolitan area I surveyed, fewer than half the millionaires lived in high-rent districts.
That small insight changed my life. It led me out of an academic career (I was a professor of marketing at Georgia State University), inspired me to write three books on affluence, and made me an adviser to corporations that sell products to individuals with high net worth.
What most people don’t realize is that wealth isn’t the same as income. If you make $1 million a year and spend $1 million, you’re not getting wealthier, you’re just living high. Wealth is what you accumulate, not what you spend.
How do you become wealthy? There, too, most people have it wrong. It’s rarely luck or inheritance or even intelligence that builds fortunes. Wealth is more often the inexorable result of a person’s hard work, perseverance and, most of all, self-discipline.
Who tends to become wealthy? Not the exotic back-stabbers and dabblers in high finance you see depicted on TV. The average person with a net worth of $1 million or more is usually a businessman who has lived all his adult life in the same town. He owns a small factory, a chain of stores or a service company. Married once, and still married, he lives in a middle-class neighborhood, next to people with a fraction of his wealth. He’s a compulsive saver and investor. And he’s made his money on his own: 80 percent of America’s millionaires are first-generation rich.
So millionaires are dull? By Hollywood standards, maybe. But these dull folks have something exciting to teach us about money.
Attitude is the greatest difference between millionaires and the rest of us. I’ve also learned that the rich follow certain rules. Here are some of the most important ones:
1) Live below your means. The most successful accumulators of wealth spend far less than they can afford on houses, cars, vacations and entertainment. Why? Because these things offer little or no return. The wealthy would rather put their money into investments or their businesses. It’s an attitude.
As many millionaires see it, a luxury house is a bad investment. Why pay $500,000 when a $150,000 house will do? That extra $350,000 could be earning interest or building equity.
Millionaires understand that when you buy a luxury house, you buy a luxury life-style too. Your property taxes skyrocket, along with the cost of utilities and insurance, and the prices of nearby services, such as grocery stores, tend to be higher. The only thing worse than a big house, millionaires have told me, is the flood of problems that comes with it.
The rich man’s attitude can also be seen in his car. Many drive old, unpretentious sedans. Sam Walton, billionaire founder of the Wal-Mart Stores, Inc., drove a pickup truck. Another fellow said, “I buy them by the poundâ€”the biggest car I can find for the least amount of money.”
How simply can a millionaire live? A teacher in New York began investing in stocks. After a few years, he quit teaching and got a job with the fire department. Why? Firefighters have lots of free time, and he needed more time to track his investments.
By his late 50s, he had accumulated a net worth of more than $5 million. But he continued living on his fireman’s salary and remained with the department until retirement. Another example of the wealthy person’s attitude: he didn’t want to lose his pension.
2) Emphasize net worth; de-emphasize income. Most millionaires measure success by net worth, not income. Instead of taking their money home, they plow as much as they can into their businesses, stock portfolios and other assets. Why? Because the government doesn’t tax wealth; it taxes income. And the more income you bring home for consumption, the more the government takes.
The person who piles up net worth fastest tends to put every dollar he can into investments, not consumption. All the while, of course, he’s reinvesting his earnings from investments and watching his net worth sour. That’s the attitude as well.
3) Cultivate good advice. The best wealth-builders pay careful attention to their money and seek professional advice. Those who spend heavily on cars, boats and houses, I’ve found, tend to skimp on investment advice. Those who skimp on the luxuries are usually more willing to pay top dollar for good legal and financial advice.
They are also always looking for new investment possibilities. The most mysterious part of wealth accumulation may be this sixth sense that some millionaires develop for hidden opportunities.
One of the finest examples I’ve come across was a doctor in Tennessee. He was renowned for buying a parcel of land just before a shopping mall located across the street, and stock in a new bank just as it was taking off.
Where did he get his information? From his patients. While rendering care, he learned of investment opportunities before they were common knowledge. And he was shrewd enough to separate the good tips from the bad.
4) Develop a plan. The self-made rich develop clear goals for their money. They may wish to retire early, or they may want to leave an estate to their children. The goals vary, but two things are consistent: they have a dollar figure in mindâ€”the amount they want to save by age 50, perhapsâ€”and they work unceasingly toward that goal.
Start developing a plan now, regardless of your age. How much do you want to accumulate, and by what age? Then work backward. To meet your goal, how much should you save every year?
One thing may surprise you. If you make wealthâ€”not just incomeâ€”your goal, the luxury house you’ve been dreaming about won’t seem so alluring. You’ll have the attitude.
Isn’t it funny how all those lessons stay true today? Imagine what our economy would look like today if everyone took this approach. Maybe this Great Idea ought to be forwarded to everyone in your address book so they can be reminded that the steps one needs to take to be successful are not hard to understand; they are actually quite easy to understand. The implementation of them is not easy; but if you stay focused, you can win at the game of business and life. Let me know what you think.