“The greatest impact of one's ability to build wealth over time is saving.”
– The Next Millionaire Next Door
We have all become accustomed to the modern cartoon caricature of “the evil rich”, with their outrageous mansions, their pretentious cars, and their f*** you money. But endemic today in any discussion about the rich is the problem of income inequality and the idea of a zero-sum game. That is, for one to gain, someone else must lose. With 78 percent of Americans living paycheck to paycheck, many are vulnerable to misinformation. That is where the media and politicians persistently sell the myth of the wealthy as greedy con artists unwilling to pay their fair share. But perception is not always reality. What separates the rich from the poor most often is nothing more than a frugal lifestyle and a discipline for savings. The good news is almost anyone can obtain it, with a little bit of ingenuity and restraint.
There is, in fact, a formula for wealth. And it's rather simple. Spend less than you earn, invest what you save, and reap the benefits of compounded interest. Certainly, a high income is helpful, but not a guarantee of wealth. For most, a planned budget, careful spending, structured savings, and informed investing are key to financial independence. Senator Elizabeth Warren suggested a 50/30/20 split for budgeting of after-tax income with 50 percent for needs, 30 percent for wants, and 20 percent for savings and debt. A no-nonsense process for keeping on track. In addition to planning, those most likely to reach the higher echelons of riches also display certain virtues and character. The traditional values of thrift, hard work, and accountability are obvious. But the greatest secret to success may be the art of delayed gratification.
In Thomas Stanley’s 2019 book, “The Next Millionaire Next Door”, Stanley and his daughter Sarah, who took over after his untimely death in 2015, update his popular 1996 book, “The Millionaire Next Door” to reveal that the test of time has shown the American Dream is safe and sound for all who have the discipline and perseverance to make it happen. What continues to be unique about most millionaires is they had a plan for the future, their success didn’t just happen.
Perhaps the biggest misunderstanding when it comes to riches is the conflating of income with wealth. Income is merely your take-home pay, the amount you earn every year to pay your bills and support your lifestyle. A high income, of course, would seem to make wealth accumulation easier. However, many people with high incomes have high-consumption lifestyles, filled with luxury cars, big homes, and other tangible assets. These individuals live to spend, often doing so beyond their means, making them prone to debt. And while a high income can give you the appearance of wealth, too many have succumbed to what the Stanleys call the consumer arms race, drowning in material goods with little to no net worth. Because the more you spend, the more discretionary income is needed, there is little to no opportunity for savings and investing. By overspending, these “buy now, pay later” consumers have become slaves to their paychecks, and are not too dissimilar from the working class and poor, who suffer from limited means.
Wealth, on the other hand, is what you accumulate over time. It is your net worth, including all your assets, and is always a measure that is more important than your income. Many millionaires don’t attain financial security until their 50s or older after decades of good choices, steady savings, and little debt. By living within their means and abstaining from the desire to keep up with the neighbors, they have saved and invested their way to financial independence and great wealth. In fact, studies show that saving is more conducive to riches than even high incomes or high intelligence.
Along with a financial prowess for planning the future, a lower taxable income helps to build wealth by using tax-deferred shelters and choosing appreciable assets over ones that devalue over time. Then through saving and investing, growth occurs greatest for those who begin their financial planning early in their careers. Albert Einstein called compound interest the eighth wonder of the world. Stunning financial gains are made by investing and allowing the interest to be reinvested over time.
Most millionaires are self-made, self-employed, small business owners, even though self-employment is only a small sector of the workforce in the US. Most are married and have remained in the same middle-class neighborhoods they initially settled in, with their two-parent households allowing them to live off one income while investing the other. Despite the mischaracterization of the rich, most live in modest homes that were the only assets they took out loans to purchase. They are also most likely to drive middle-class cars, bought and paid for without a loan. Some increase their incomes by moonlighting, turning hobbies into revenue streams.
But the thrift to which many millionaires live did not develop on its own. Those who attained millionaire status tend to come from frugal households, where their parents, too, not only lived within their means but taught their children to be mindful of societal traps. Then, by encouraging them with positive affirmations and arming them with the tools to succeed, America’s richest have gone on to teach their own children these same values. As such, they have not succumbed to the modern scourge of victimhood, where so many believe that others determine their lot in life. For those who believe they can’t get ahead rarely do.
There is a carefully crafted vision of the rich, and there is the reality of the rich. Although some choose to blame the rich for all that is wrong in the world, becoming self-sufficient is a noble goal for everyone. By reducing their consumption, many average citizens have saved their way to great wealth. By taking another look at this millionaire class, even the most ardent class warfare activists may come to not only admire but to mimic their habits.
Even Bernie Sanders and Elizabeth Warren, who pretend to despise the rich, couldn’t keep themselves out of the club.
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