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March 29, 2011

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It's funny how most people assume that millionaires have a large, 6-figure income rolling in each year. Actually, it's quite the opposite.

Most millionaires are careful planners and wise investors. They start investing their money early in life, and continue contributing consistantly!

Compound interest is their best friend, not the latest sports car.

Thanks for the great post! It's good to be reminded that almost anyone can become a millionaire.

It would be helpful if you would define your terms; what do you mean by rich and what do you mean by wealthy? Without those definitions the post is vague.

I do agree that it is possible to earn and average income (about $50,000 in 2009 according to BLM) and save enough from earned income to accumulate a million dollars in thirty or forty years, but is that amount rich? Would a million dollars in liquid assets qualify a person as wealthy?

I think not. At current interest rates, one million dollars would earn you about $20,000 a year -- hardly rich in my book!

I think rich starts at five-million in liquid assets. You will not accumulate that amount by pinching pennies on a middle-class, five-figure income unless you get real lucky in the stock market but you can get unlucky there as well so that is a gamble.

You can also achieve financial independence over twenty or thirty years but most people won't for the very reason you mention in the post: Lack of the required level of self-discipline.

20% of the population owns 80% of the wealth in America. You will not join the 20% club clipping coupons or taking a bag lunch to work.

To do that will almost certainly require business ownership. But as you also mention in the post, most of us are not cut out to be entrepreneurs mostly because it requires really hard work, long hours, and laser-like focus. And therein lies the rub...

The statistic "there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more" is a little meaningless without data on the amount of millionaires in $301,000 to $999,000 valued homes.

In my area of the country it doesn't matter how much you make or what your net worth is because the housing market tops out at about $800,000. At least here, it's virtually impossible to live in a $1 million house whether you wanted to or not.

I love this and couldn't agree more!!!

I'll be a millionaire, simply because I have maxed out my 401k since starting to work at 22. I'm now 34 and have done the calculation for when I'm 60, it's pretty exciting! And, it's not because I make a million dollars in salary, it's the savings I've accumulated that will grow.

The term living below your means gets such a bad rap, there is such a negative connotation with that term. I wish we could just say spend less than you make and get rid of the "live below your means" term....people anchor on the words "live below" and it just sounds horrible. but in reality, you're not living below anything....you're just saving some of your money and not spending it all. Anyway, great post.

On the physical fitness side
-millionaires also have disposable income, good medical care, and more leisure time to help them stay healthy. As always with these things, cause and effect run both ways-its easier to be healthy when wealthy, since you can join a gym, buy more expensive healthy food, educate yourself more easily, and have an easier time doing the future planning necessary to be healthy. On the other hand, people with the drive and commitment to be wealthy also are likely to be more disciplined in other walks of life as well.

tmgbooks --

1. Do you have $1 million or more in net worth?

2. $1 million in net worth places you among the top few percentages of the most wealthy people in America.

Maybe simply " live within ones means," not "below." Pocket as much as you can.

Eating well doesn't require a lot of money, but does require learning how to cook, a knowledge of nutrition, and growing a garden helps, too. One can buy a kettle bell and some Keds (the less high tech the design, the better for the foot--see bare footing running and "Born to Run") for a good workout. Used bikes are cheap.

The point about the house is true for us. We have just over 1M in investments/retirement, and our house is worth about 130K according to zillow. We would not have been able to save as quickly if we'd been in a more expensive home. Not only would the payments have been more, but we'd have had to buy more furnishings, etc. to fill the additional (mostly unused) rooms.

Now, as for whether we fit in with the physical fitness attribute, that is another story! "Spending less than you earn" just means there is more left over to spend on Moosetracks. ;)

A great deal of the wealth accumulated by people like myself that worked for a company but never reached top management has been generated from one of two sources. I never even reached the first level of supervision, my highest position, in 1992, after 32 years at the largest aerospace company was a staff engineer to a department manager.

One source is Real Estate. Forgetting about one's home since, without going into debt, that money is locked up and doesn't generate income. The other Real Estate source is rental properties. I have known several colleagues that started acquiring cheap rental homes during the real estate boom and retired with 8-10 properties, which after a while all start generating nice, positive cash flows.

The other source is of course the Stock Market. The market is a very liquid investment where you can move your money IN and OUT whenever you want for very little cost in commissions. The market is however very volatile and if one's goal is to become "Rich" and stay "Rich" one's investments must be actively managed.
In my case, my skills are "Analytical" rather than "People" in nature and I never wanted the hassle of dealing with renters and coping with the many problems involving the management of rentals so I chose the stock market but made a big effort to learn how to become a "Savvy" investor, as the example below demonstrates.

Here's the classic example of what the market can do to one's investments if managed passively. The index in my example is the Nasdaq 100 which contains the largest 100 companies in the Nasdaq.

Date ............................ Value of Nasdaq 100 ...... Value of our portfolio

04/02/1997 ........................... 802.5 ................................ $824,195
03/27/2000 ......................... 4704.7 ............................ $2,978,231
10/09/2002 ........................... 807.4 ............................ $3,288,169

As you can see, passive management would have got you nothing in the same timeframe that I quadrupled our portfolio, and it has grown ever since without a single losing year.

ACS --

You took the words out of my mouth... ;-)

At at age 38 in approx 2008, I hit $1M~, then a divorce took $400K+ in 2000 and the '01 and '03 markets took some more. I worked HARD again, kept investing when others said "the times are bad" (dollar cost averaged in bad years) and saving too (those early '00 decade I bonds are priceless!) and retired in 2007~ w/ $2.85M. Paid taxes, spent some and (I only count my house at tax valuation, not market plus CASH/investments, no STUFF in my net worth), still have been 2.2~ to $2.4M since. My income from pensions (about $40K~ since I have no mortgage and a VERY tax efficient portfolio))covers my living needs. $4k a month (!) more in guaranteed annuity at age 60 (minimum, could be more)means I better SPEND! Plus 1251 is my age 632 social security w/o another penny in the pot! Early Retirement and financial freedom allows me to make up for some lost years of my 30's and 40's but, I'm doing well at it! It's discipline, I started a plan at age 22 and stuck to it. Only debt EVER in my life was a 48 mo car loan for $7K I paid off in 19 mos and a trailer loan as a young AF officer that at $350~ a month (26 mos) I recoverd when I sold it. NEVER any other debt! THAT is the secret, ALWAYS kive BELOW (well below) your means. Forget saving 10%, 15% minimum to up to 50% (after taxes)when you make the big ($500K+) inocme makes it happen!

meant 1998 in above first sentence, not 2008! Mea culpa!

I can attest to the logic of Dr. Stanley.

You need to really focus on minimizing your expenses, especially when young to become a PAW... like most of the millionaires next door.

I remember when I was 23 and took my first job as an Engineer making $42k a year. $3500 a month gross paycheck, after taxes and 401k contributions take home was around $2600 / month. Besides giving my first paycheck to my parents to thank them for paying for college for me, I was paying $780 per month rent for a 1 BR apt, plus food, phone bills, and car insurance. Roughly saving $1000 -$1200 a month out of my income or 30 - 35% of gross salary.

Instead of spending more I actually found ways to cut my rent by living with 2 other guys in a very basic small house (2 BR, 1 BA, the 3rd guy slept in the basement!). This was in Northern Indiana. My share of the 'rent' (covering mortgage only) was $120 per month! It was great to live so cheaply, my friends from NYC were blown away at how cheap this was, and I got a chance to live with people who were very blue collar but interesting people. It took me out of my comfort zone, and I enjoyed that. No doubt it is much easier for a man to do this than a woman but I was watchful not to get into a dicey living situation.

My savings rate jumped by $660 / month or 20% of my salary, and I started to invest a bit with the extra savings.

I kept up that same attitude throughout my career and that is how I'm living in a 2BR / 2BA condo with my wife that is worth less than $300k... even though peers of mine are living in very large houses with 5 bathrooms, swimming pools, etc.

I can personally vouch for the research done at MND, it has been very close to my own experience.

It's not what you earn, but what you keep.

-Mike

Just to clarify: the condo (not my wife) is worth less than $300k!!!

My wife is priceless of course :-)

Mike --

Funny!!!! ;-)

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