Millionaires are everyone's dream, right?
Unless you are a hermit or an ascetic, you would love to be a millionaire. And if you are already a millionaire, you would love to be a billionaire.
According to Daniel Kahneman, money does not buy happiness, but lack of money certainly does. The allure of becoming a millionaire often ignites a spark in our imaginations, painting vivid pictures of luxurious lifestyles filled with fancy cars, sprawling mansions, and endless vacations. The dream embodies not just financial freedom but also the promise of security and opportunities to explore passions without constraints.
However, while the path to wealth might seem enticingly straightforward—often marketed through success stories that suggest one clever idea or investment can lead to riches—the reality is far more nuanced. Becoming a millionaire typically requires dedication, strategic saving money habits, and an understanding that building wealth is rarely instantaneous.
It involves meticulous planning where setting aside portions of income becomes second nature; it’s about making sacrifices now for future rewards. As aspirations grow amidst societal pressures glorifying affluence, many find themselves caught in the cycle of wanting more without fully grasping what it takes to sustainably accumulate wealth over time.
'The Millionaire Next Door' is a top-rated bestseller written by Thomas J Stanley, Ph.D., and William Danko, Ph.D. This book explores the secrets behind the financial success of the top billionaires.
A Millionaire Next Door's Making
It is the result of years of research into the making of millionaires, specifically in the United States. Significantly, the authors emphasize that affluence is not always wealth.
There are many people with wealth who do not live in expensive homes in upscale neighborhoods with expensive cars, according to research.
As a result of their research into this fascinating subject, the authors discovered the secrets of wealthy people and advised several corporations on selling strategies to them.
Although the book was written in the 1980s and revised in the 1990s, the principles it discusses are still relevant today.
Income and wealth are not the same thing
The authors emphasize that wealth is not income. High incomes only allow you to live a lavish lifestyle. It doesn't matter if you make a million dollars a year and spend it all; wealth comes from what you accumulate, not what you spend.
The book talks about the American boxing promoter, Don King. Donald King is well known for his involvement in several historic boxing matchups. King's career highlights include, among multiple other enterprises, promoting "The Rumble in the Jungle" and the "Thrilla in Manila".
Although the media portray Don King's buying habits, the hundreds of millionaires who live a quiet lifestyle are not interested in designer suits and shoes. The publicity the likes of Don King receive leads young people to believe that buying branded stuff is a sign of wealth.
Those who are wealthy and affluent do not believe that tomorrow's cash should be spent today. Moreover, they are not debt-prone nor consumption-oriented, and they take time to plan and budget their annual income. Additionally, they utilize their credit cards to save rather than spend money.
In order to build wealth, they allocate their time, energy, and money efficiently
Prodigal and Under Accumulators of Wealth (PAW and UAW)
Time, energy, and money are allocated by wealthy people in ways that enhance their net worth. Compared to Under Accumulators of Wealth (UAW), Prodigious Accumulators of Wealth (PAW) devote twice as much time to planning their financial investments each month.
There was a surprising negative correlation between wealth and education, according to the authors. High-income wealthy people are significantly less likely than UAWs to hold degrees. Most of the wealthy high-income people are not well educated or hold degrees.
Despite lack of education, the PAWs spend enough time to maximize wealth generation. Significantly, they begin earning and investing early in life, budgeting and planning their income and expenses. As a result, their children are also influenced by their parents' frugality and living within their means.
Consequently, their adult children do not consider their affluent parents' wealth as their own, nor do they expect their parents to constantly support them financially. They typically look at income tax as a percentage of their total wealth rather than as a percentage of their realized income.
According to the author's research, PAW spend over 100 hours in a year on financial planning, compared to UAW who spend about 55.2 hours. The majority of PAWs invest in the stock market, but they are not active traders. Once they decide which stock to buy, they do not trade or monitor their stock performance on a daily basis.
Wealth generators hold their stocks for an average of four to six years.
Millionaires Always Strive for Financial Independence
The importance of financial independence is more important to them than displaying high social status. According to W.W.Allan, a self-made millionaire, "If your goal is to become financially secure, you will probably achieve it. However, if your goal is to make money to spend on the good life, you will never succeed."
While some people may be high-income producers, they only work to spend and do not achieve financial independence. There is no doubt that PAWs love working, while UAWs work to support their conspicuous consumption habits.
PAWs tend not to display their wealth through luxury cars or a high consumption lifestyle, and many do not even own big houses.
How much have these millionaires ever spent on their cars?
About 20 percent of millionaires never spent more than $19,950 on a vehicle in their entire lives. Fifty percent never spent more than $29,000.
If you do a simple calculation on the living expenses calculator, the average American spends at least 30% of their net worth purchasing a motor vehicle, compared with the average American. In other words, an average American buys a new motor vehicle at a price 72 percent of what a typical millionaire ever spent on a motor vehicle.
A second finding of this study was that the majority of millionaires purchase new cars rather than used ones. New cars are easier to maintain and more reliable—but some have used motor vehicles, loyalists as well—because they feel that buying a new car takes less time and effort.
Millionaires are Frugal
Millionaires believe that being frugal is the key to achieving financial independence. First, they believe the benefits of being financially independent. By constantly reminding themselves that many people with high-status artifacts have little wealth, they prevent themselves from excessive spending. For them a budget calculator is a must to track their expenses.
A dollar is used to grow more dollars. According to a real millionaire, “My family understood the value of a dollar. Dad used to tell me seeds are like dollars. You can sow them or you can plant them. But when you see what seeds turned into ten feet of corn, you do not want to waste them. I enjoy watching things grow, whether I consume them or plant them."
Their parents did not provide them with affordable outpatient care. In economic outpatient care, parents give substantial economic gifts and "acts of kindness" to their adult children and grandchildren. Wealth builders achieve their millions by living a frugal, disciplined lifestyle. However, they are not frugal when supporting their adult children and grandchildren.
How does this economic largess result, then? The wealth builders who provide a certain form of economic outpatient care have significantly less wealth than those parents whose adult children are financially independent within the same age, income, and occupational cohort.
They become living proof that "It is much easier to spend other people's money than self-generated dollars.". Instead of becoming wealth builders, they become wealth consumers.
Their parents never learned the maxim that made them successful: "Live below your means no matter what your income is."
Typically, adult children waiting for their next dose of economic outpatient care are not very productive. Cash gifts are often used to support unrealistically high lifestyles.
Economic Outpatient Care for Adult Children
A typical outcome of this Economic Outpatient Care for adult children is
Saving and investing precipitate more consumption than giving
It is difficult for gift recipients to distinguish between their wealth and their parents' wealth
Receivers of gifts are significantly more likely to use credit than non-receivers
Gift recipients invest much less money than non-recipients
This Economic Outpatient Care often results in the parents' business not lasting beyond their lifetime. The adult children who inherit the business lack the skills or motivation to expand it. Their adult children are economically independent.
"Those who receive more money accumulate fewer dollars, while those who receive less money accumulate more."
The average millionaire in the United States who has successful adult children sees raising them as an art form. They adopt strategies and rules to ensure that their children become economically independent once they become adults.
Millionaire's way of Raising Children
When it comes to raising children as responsible adults, the authors found the following pattern with the typical millionaire. According to the research, many high-income people never reveal their wealth to their children.
However, case studies have shown that children of UAWs are more likely to be high earners than wealth accumulators. This is because they were told by their parents that they were wealthy as children.
No matter how wealthy you are, teach your children discipline and frugality: The PAWs always teach discipline and frugality to their children. Their example of living frugally taught them this. “Kids are very smart. They won't obey rules their parents themselves won't follow.” They are taught to be tough, independent, and responsible.
Be sure your children do not realize you are wealthy by this time until they have developed a mature, disciplined, and adult lifestyle and profession: The PAWs set up trusts for their children to ensure that the money will only be distributed once they are 40 years old. At this point, the parents' own children may have established themselves as professionals and will no longer require these funds.
It is important to teach your children that money is not the only thing that matters: Money is important, but there are many other things that are just as valuable. There is a strong emphasis on good health, a loving family, strong bonds of friendship, reputation, integrity, achievement, etc., among PAWs.
Millionaires are adept at identifying market opportunities
By providing a ready market for various service providers, the wealthy Americans who swear by wealth accumulation also create wealth for others. Those who supply this affluent market become wealthy themselves very often. With so much money being created in less time, the market size of the affluent is rapidly expanding.
They leverage their wealth as a critical mass and get the best rates from their service providers because they are excellent marketers. Business opportunities abound for many people, including attorneys, tax consultants, and real estate agents.
They Pick the Right Career
Affluent Americans are mostly business owners, including self-employed professionals. Twenty percent of these households are headed by retirees. Around 18 percent of households are headed by a self-employed business owner or professional. However, self-employed people are four times as likely to be millionaires as those who work for others.
Affluent professionals are aware of the risks and odds of succeeding or failing in business. They also seem to know that only a small minority of self-employed professionals fail to make a profit every year. Compared to small businesses in general, most professional service firms are more profitable.
Businesses face several challenges, but keeping up with ever-changing compliance is the biggest challenge. Affluent parents always encourage their children to choose careers that make money.
In conclusion
The book was written over three decades ago by Thomas J Stanley and William Danko, but some of its principles are still relevant today. In our technologically advanced world, it is relatively easy to create wealth. However, the challenge is maintaining it and growing it.
With an increasingly consumerist world, living a frugal life is not easy. We must learn to balance our desires and build wealth. In addition to wealth creation, there are more ways than ever to make money thanks to technology.
Building wealth is a habit and it can be fun once you get the hang of it. You must build your wealth and pass it on to the next generation so they can multiply it as well.
Comments