Think joining the almost 11 million millionaires in the United States is a pipe dream? Actually, it’s not. 80% of millionaires are first-generation rich, meaning they are self-made millionaires in contrast to the commonly held belief that most wealthy people inherit their wealth. The pop culture concept of a millionaire is quite false and most millionaires live a very simple lifestyle. That’s how they become and stay millionaires. Everyday people who join this illustrious crowd are like you and me but with key money habits that propel them into the ranks of the wealthy.
One of the most important books I ever read that pointed out these facts and had a lasting impact on my spending habits is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko. It’s one of the main reasons I was able to semi-retire at 37 while my professional peers went further into debt and to this day remain mired in the rat race. If you incorporate the same lessons into your spending and earning habits, you too will be financially stable and financially independent. Here’s why and even better, how.
Everyday, Self-Made Millionaires Aren’t What You Think
Want to succeed financially? Study those who did it! Authors Stanley and Danko did extensive profiling of people whose net worth defined them as millionaires along with those whose salaries and age defined them as likely millionaires. Crunching the date, these two PhDs created a detailed profile of the typical millionaire. Their extensive interviews with these millionaires paint a picture of what it actually means to be a millionaire in today’s society. The authors write, “In the course of our investigations, we discovered seven common denominators among those who successfully build wealth.”
When you read about the lifestyles of typical millionaires and learn their seven habits, you realize they are not at all what pop culture would have us believe about flashy possessions and lavish lifestyles. When I learned this, I understood that being a millionaire was actually quite achievable. Read on to see what I mean.
The Money, Spending and Saving Paradox
Remember, the pop culture image of a millionaire is quite wrong. Most of these almost 11 million people in the US live simple lives. We watch celebrities on TV, not the quiet millionaire going to work and making good money choices. That’s not flashy enough for the news so we see instead those few hundred ultra rich or overly glamorous millionaires who make good TV and wind up filing for bankruptcy or die penniless.
Interestingly, many people who earn high incomes are not rich, warn Stanley and Danko. Most people with high incomes fail to accumulate any lasting wealth. They live hyperconsumer lifestyles, spending their money as fast as they earn it. But “high income” is difficult to define. Most Americans live paycheck to paycheck, spending their money as fast as they earn it, not just ill-defined “high income” people. We tend to “upgrade” our spending to match our new income no matter our tax bracket. You might have previously eaten from the dollar menu at McDonald’s but with a pay increase, you start buying at Starbucks or your clothes go from Target to J. Crew and your kids go from public school to private school – either way, you paycheck is gone.
Spending, no matter your income, can derail you. A person with a six figure income – like lawyers and doctors for instance – who spends their money paycheck to paycheck on lifestyle and consumer goods will be just as broke as the person with a $20,000 income living paycheck to paycheck if they both lose their jobs. Remember those 800,000 government workers during the recent government shutdown? Since most were living paycheck to paycheck, many couldn’t pay their bills and some had to go on welfare and eat at soup kitchens.
High income spenders live flashily but walk a high wire act hoping no one is about to cut the wire. Low income earners have a difficult time accumulating wealth – whether they are frugal or spenders. The middle class actually have an opportunity to accumulate wealth but usually spend their money as fast as they make it in a hyperconsumptive way. In these three cases, accumulating wealth doesn’t happen.
In order to accumulate wealth, in order to become rich, one must not only earn a lot (play “good offense”, according to Stanley and Danko), but also develop frugal habits (play “good defense”). You can’t just spend less or earn more. Both are essential to financial success. And “earn a lot” doesn’t mean making a million dollar salary just so you know. Self-made millionaires include carpenters, plumbers, dentists, lawyers, and educators – just for starters.
The most important takeaway? Millionaires generally have a high income (at least middle class) and a frugal mindset.
According to Stanley and Danko, they also share seven key characteristics and happily enough we can all cultivate them.
The Seven Habits of Your Common, Everyday Self-Made Millionaires
Here are the surprising stats on the real people who become millionaires.
- They live well below their means. In general, millionaires are frugal. Not only do they self-identify as frugal, they actually live the life. They take extraordinary steps to save money. They don’t live lavish lifestyles. They’re willing to pay for quality, but not for image.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth. Millionaires budget. They also plan their investments and financial future. They begin earning and investing early in life.
- They believe that financial independence is more important than displaying high social status. For instance, usually millionaires don’t have fancy cars. They drive mundane domestic models, and they keep them for years.
- Their parents did not provide economic outpatient care. That is, most millionaires were not financially supported by their parents. The authors’ research indicates that “the more dollars adult children receive [from their parents], the fewer they accumulate, while those who are given fewer dollars accumulate more”.
- Their adult children are economically self-sufficient. The authors clearly believe that giving money to adult children damages their ability to succeed while impairing the parents’ ability to accumulate wealth for their own retirement years.
- They are proficient in targeting market opportunities. “Very often those who supply the affluent become wealthy themselves.” The authors discuss how one of the best ways to make money is to sell products or services to those who already have money. They list a number of occupations they feel have long-term potential in this area.
- They chose the right occupation. “Self-employed people are four times more likely to be millionaires than those who work for others.” After all, 50% of millionaires own a business. There is no magic list of businesses from which wealth is derived — people can be successful with any type of business. In fact, most millionaire business owners make their money in “dull-normal” industries. They build cabinets. They sell shoes. They’re dentists. They own bowling alleys. They make boxes. There’s no magic bullet.
The typical millionaire has these seven characteristics and they are traits we can cultivate in ourselves. That said, we can synthesize this list further for ease of memory.
The #1 Habit of Common People Who Become Millionaires
Most American’s live in a financial house of cards. I’m firmly convinced I would have been part of the shrinking middle class that feels pinched and squeezed at every corner had I not changed my spending habits thanks to The Millionaire Next Door. My peers and others follow the hyperconsumptive spending habits of modern America. I retired. They’re making good money but falling further behind. How do our spending habits differ?
The key is “Whatever your income, always live below your means.”
If you don’t, according to authors Stanley and Danko, you become an under accumulator of wealth and you sabotage your finances. Most Americans live paycheck to paycheck. One in three say they couldn’t come up with $2,000 if faced with an emergency like an urgent home repair, medical crisis or car accident. For most people, even a $1000 emergency would put them into debt since they don’t have even that much in their savings. Is this you?
In order to pull ahead, we have to accumulate wealth. This means not spending all our money every paycheck and prioritizing our spending and savings. This is why the 70/30 Rule is so important: live on 70% of net income and invest the remaining 30% in money-making investments. Follow this rule and you definitely will accumulate wealth.
After avidly studying the wealthy, Stanley and Danko realized that becoming a millionaire is not rocket science, just a matter of planning well, living below your means and avoiding a few stupid mistakes. Three rules will improve your chances of ending up with a million dollars in the bank:
- Save responsibly from the moment you first start earning more than you need to live.
- Use a simple formula to calculate if you’re falling short of your financial potential.
- Avoid economic outpatient care to reach your goal.
Here are how the rules work and they are habits anyone can develop. Becoming a millionaire doesn’t take fancy college degrees or business acumen. You don’t have to flip houses or be an entrepreneur. Here’s what to remember.
Rule #1: Save Responsibly, aka Whatever Your Income, Always Live Below Your Means
The moment you earn more than you need for living, save as much as you responsibly can and avoid spending cash on things you don’t need.
In The Millionaire Next Door, Stanley and Danko discuss the habits of actual everyday millionaires – the real people, with real jobs who were not born to wealth but slowly and steadily accumulated into the million dollar club. They’re not flashy. In fact, they are quite the opposite. They’re frugal and they live below their means. Most of us are not frugal. Instead we’re spendthrifts.
A recent survey by TD Ameritrade found that millennials consider travel and vacation, dining out and takeout, followed by coffee as their three top lifestyle essentials and spend a whopping $838 a month on unnecessary expenses, affecting their credit card debt and retirement accounts. Baby boomers aren’t much better and even the comparatively more frugal Gen Xers spend $588 a month on non-essentials.
When we consider travel, vacation, dining out/takeout, and coffee as essentials, we’re running away from financial literacy and financial stability. Essentials are must-haves that should include food, clothing, housing and insurance. And it also should include emergency and retirement savings.
If we’re not prioritizing these things and putting as much money as possible into savings and investment opportunities, according to Stanley and Danko we are a big-hat-no-cattle type person. That’s someone who appears wealthy (like a farmer with a big hat), but in reality spends all their money on keeping up this illusion (and thus has no actual cattle).
Everyday people who become millionaires are not big hat, no cattle people. They buy used cars and maintain them. They buy smaller houses at reasonable prices and aren’t using their paychecks on the latest fashion trends or to eat out every week. Quite the opposite. They prioritize things like savings, retirement accounts, and investments. They make things last rather than continually replacing or upgrading them. They like having a margin of safety that means six to nine months’ worth of expenses saved up in case of an emergency.
Another important lesson from The Millionaire Next Door changed my life and it can change yours. Stanley and Danko noted that even if you start making a nice salary out of college, keep living like you’re still a college student so that you automatically live below your means. This is one of the key reasons I was able to semi-retire at 37. For years after reading this book I lived on basically my college budget. I got free or deeply discounted furniture from friends when they upgraded, grabbed it like-new from outside the trash chutes when the rich college kids in my building just tossed it before heading home for the summer. I didn’t buy stuff to decorate or fancy bed sheets and blankets. I didn’t buy a car when public transportation worked fine and was far less expensive. I shopped grocery stores, not farmer’s markets and bought deals, not brand names.
Meanwhile everyone around me shopped Neiman Marcus or J. Crew for even their t-shirts. They may have sometimes shopped at Ikea but they still spent hundreds and thousands on furniture and furnishings right out of university when they got their first professional jobs. Tax refunds went to pricy vacations or consumer goods rather than into IRAs or investments. They bought new cars and moved into luxury apartments. They enjoyed dining out at least once a week, buying their lunches and going to Starbucks for breakfast. These are middle class lifestyle habits but people mistake this for living well. It isn’t. It is wasting most of your money and making you dependent on each paycheck to sustain yourself.
Hyperconsumerism. Poverty is not having food, clothing, shelter and not knowing if you’ll get the next paycheck. Being “poor” these days has become synonymous with “not being able to buy or do whatever we want.” That’s not being poor and it’s not poverty. To me, that’s greed but another term for it is hyperconsumerism. There are so many products, restaurants and experiences for us to experience, we can’t ever experience them all. Even the gazillionares can’t. Just because we can’t eat out once a week and go out to drinks with our friends several times a week or afford a two-week vacation in France every year does not make us poor when we make on average $48,150 per capita. Thinking so does a horrible disservice to the truly poor.
Volunteering at food pantries, homeless kitchens and with refugee organizations, I saw true poverty. Being homeless as a kid and eating ramen because it was all we could afford if we didn’t go to charity kitchens makes me very aware of what it means to be poor. When I see people get upset and say they’re poor because they can’t afford to go to a second movie that week, I really have to bite my tongue. That’s hyperconsumption, not being poor.
Frugal living. Being frugal, skimping on the niceties early on in your earning career isn’t sexy. Living on less than what you make and spending close to only what you need for living – the real essentials, not the “lifestyle” essentials – won’t earn you any kudos from most people. But then again, most people live paycheck to paycheck and a $1000 emergency that you can handle because you’re frugal will put them further into debt. You don’t have to live like a college kid forever either. Adopt the 70/30 Rule and you’ll be just fine – able to enjoy life but also taking care of your financial stability.
I loved The Millionaire Next Door. Because I grew up without any frills, living like a college student like Stanley and Danko recommended was an easy lifestyle to maintain. Sometimes I splurged on trips to Europe but I planned for those splurges and they weren’t yearly. At 37, I semi-retired thanks to Stanley’s and Danko’s frugality lessons and travelled the world for two years, able to live on the income of my investments, not on savings. I still do. You can too.
Rule #2 – Calculate if you’re not reaching your full financial potential with this simple equation
In The Millionaire Next Door, Stanley and Danko note that one habit of everyday millionaires is their awareness of their finances and their preference for putting money away rather than spending it. Stanley came up with a simple formula to calculate your expected wealth:
Multiply your age with your pre-tax annual income and divide by 10.
Whatever this number is, it reflects how rich you could be right now, if you’ve already cultivated good spending habits. For example, if you earn $80,000 at age 30, your expected wealth comes out to $240,000.
Take this with a grain of salt, since it takes younger people longer to reach their expected wealth, because of compounding interest – a 50-year old will have reaped the benefits of the interest they get on their interest for much longer, for example.
Try to get closer and closer to your expected wealth over time, not by saving excessively, but by avoiding spending too much.
Rule #3: No Economic Outpatient Care
Do you know how kids with rich parents often can’t handle their finances and never worry about spending? That’s what economic outpatient care is all about. Most affluent parents mean well when they support their children with their hard-saved money, but in reality it hurts their kid’s ability to handle money.
Almost half of all wealthy Americans sponsor their children and grandchildren with over $15k a year. This “sponsoring” can be things like paying for their study abroad, buying books, courses, travel, paying for their utilities and phone subscriptions, buying their clothes, furniture, helping with down payments on cars or houses and so on. This leads kids and grandkids to acquire a taste for this lifestyle, even though they technically can’t afford it on their own salary but will still spend the money to maintain that lifestyle anyway.
The wealthy do this but so do middle class and lower income parents and grandparents. The problem with regular economic outpatient care for the giver is that it eventually just fades into your annual income, making you believe you earn more than you do, and even calculating with that money in advance.
The lesson? If you have generous parents, don’t waste their money – at least invest it wisely. If you are a generous parent, don’t spoil your kids – you won’t do them any good.
You Don’t Have to Be a Millionaire to Appreciate Their Secrets
The Millionaire Next Door shows you the simple spending and saving habits that lead to more cash in the bank than most people earn in their life, and helps you avoid the pitfalls some potential future millionaires make on their way to financial independence. Reading The Millionaire Next Door opened my eyes to the way financially stable people actually accumulate and spend money. When I put these lessons into practice, my entire financial life changed drastically. Like I said, I was able to semi-retire in roughly 10 years. Maybe you will too.
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