Free Money Finance

Becoming a Millionaire on an Average Salary

Here's a video from Dave Ramsey detailing the story of a millionaire who never had a large salary.

The overview:

Jason averaged around $70,000 a year while serving 31 years in the military, and has now built a $2 million net worth.

His keys to success:

• No debt
• Save for a long period of time to let compound interest work
• Live below your means
• Educated himself on how to handle money
• Worked to earn more (being deployed)
• Took advantage of tax-advantaged investments and benefits
• Automated his investments
• Ignored the financial news -- stayed the course

Great, basic advice.

He also said that anyone can become a millionaire no matter what they earn. It's simply saving as much as you can for a long period of time and letting your investments compound.

So consider this post one for those who do nothing but make excuses. If you want to become wealthy, it's not that hard. Just do the basics over time and the rest takes care of itself.

15 Habits of Self-Made Millionaires

Business Insider lists 15 habits of self-made millionaires. The ones that I identify with the most are:

• They read consistently.
• They exercise.
• They pursue their own goals.
• They get up early.
• They have multiple sources of income.

A few details on each of these:

• I used to read a TON when I was working (lots of stuff on business) and I still do today (though now I read more on money, self-improvement, health, and for fun.) Some of my most recent recommended reads are Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers, Washington: A Life, and The Simple Path to Wealth: Your road map to financial independence and a rich, free life. All good books! I read a lot of blogs and websites as well (plus listen to podcasts) which could count as "reading".
• I work out six times a week -- three with weights and three cardio. I also walk at least 14k steps a day, swim once or twice a week, and hike often. That's one thing about early retirement: there's plenty of time to get into/keep in shape. I've worked out much of my life but never as much as I am now -- and I'm loving it!
• I set goals every year and then track them daily to make sure I'm making progress every day. Have done this for years and credit it with being a key reason I was able to accomplish many of my key goals.
• I have been a night person most of my life. But I had to force myself to get up since that's what my employers would demand. Surprisingly, I'm up even earlier in retirement. The reason? I have things I WANT to do not HAVE to do. A great book on the power of getting up early is The Miracle Morning: The Not-So-Obvious Secret Guaranteed to Transform Your Life (Before 8AM). Some even say getting up early can make you wealthy!
• I have several sources of income including rental properties, P2P loans, dividends, blog income, and interest. I've either had or been developing these for years -- helping prepare myself for retirement.

Those are the ones that fit me best. How about you? Do you identify with any of these -- or maybe some others on the list?

Frugal Spending Habits of Millionaires

As a contrast to high earners who can't control their spending, here's a post on the frugal spending habits of millionaires. The highlights of how rich people spend:

• 8% shopped at Goodwill stores
• 20% used coupons
• 64% said they lived in a modest, middle-class home
• 28% mowed their own lawn to save money
• 44% only purchased used cars
• 19% managed their investments themselves – they did not use financial advisors in order to save money
• 60% said they were frugal with their money
• 81% used credit cards that offered reward dollars. This way they could get something for free
• 41% spent less than $3,000 on their annual vacation

Some good stuff to comment on here:

• We've shopped at Goodwill and similar stores. You can get some good stuff there at great prices, though it's a bit hit and miss and you have to dig for the values.
• The not only use coupons but probably stack multiple discounts and ask for better prices.
• Buying a house you can afford is a big key to becoming wealthy. Doing so helps you pay off your mortgage early which limits the downward drag of debt. It also helps you control tons of other expenses related to home ownership. This is why the house you buy determines your wealth.
• We've never paid anyone to mow our grass. Either I've done it or my son has. It saves money plus gives some good exercise. Thankfully we have a small yard now anyways.
• I deviate from many millionaires on cars since I buy new. But I get great deals on new cars and drive them forever.
• I manage my money myself. Heaven forbid I'd use a financial advisor!!!
• We are moderately and selectively frugal. You don't have to re-use toilet paper and make your own toothpaste to save money. If you have a good enough income, you have plenty of room to spend AND save.
• I certainly use credit cards for cash back and make a good amount each year doing so. Now that my daughter is off to college, we're paying her tuition with credit cards and earning a fortune.
• We spent less than $3k on vacations for years (we simply went to see relatives when the kids were young). Once the kids got older, we went on a few cruises and have traveled much more.

So, that's how I stack up to the habits. Do you identify with any of these?

Are Millionaires Smarter than Others?

Money asks if millionaires are smarter than the rest of us. 

I changed the title of this post because I'm not one of the "rest of us". :)

Anyway, here are their key thoughts:

It does seem, in general, that smart people pull down fatter paychecks. Jay Zagorsky, an economist and research scientist at The Ohio State University, found that every additional point a person scored on an IQ test correlated with between roughly $200 and $600 a year in income. In other words, a person with an IQ of 130 would earn between $6,000 and $18,500 a year more than someone with an IQ of 100.

But Zagorsky also found that the same isn’t true when it comes to wealth. “There seems to be no relationship between intelligence and net worth,” he said, because there are different factors at work.

“In general, businesses tend to want to hire smarter people and pay people more, but just because you have a higher income doesn’t mean that you’re more likely to save it or are better at building that wealth,” he said.

In fact, when Zagorsky charted IQ against people’s likelihood to have financial struggles like paying bills late, declaring bankruptcy and maxing out their credit cards, people with the highest IQs were more likely to have financial instability than those with just slightly above-average scores.

Several thoughts on this:

• We've talked about the relationship between intelligence and income previously. For details, see Intelligence is Linked to Income, but Not to Wealth and Intelligence Still Linked to Income, Not Wealth.
• As those posts also detail, intelligence is not tied to wealth. Just because you're smarter and make more money doesn't mean you have the skills to build wealth.
• In fact, it appears that intelligence may be inversely related to wealth generation. A good example: doctors and lawyers generate much lower levels of wealth than expected based on income.
• Why is this the case? My guess is that smarter people earn more because they are, well, smarter. And as such they likely add more value to their employers. More value = higher pay. But the skills needed to become wealthy don't focus as much on intelligence. Here you need traits like self-control, patience, and discipline. If you look at the seven traits of The Millionaire Next Door, you'll see that intelligence is not on the list.

IMO, it's good to be both smart but disciplined as well. If you can combine these two traits, you can generate substantial wealth.

Thoughts from a Millionaire Couple

Dave Ramsey shares the story of a millionaire couple. Here are the highlights:

Jeff and Dee of Atlanta have a net worth of $2.8 million. But they didn’t win the lottery. They became wealthy after decades of smart saving and sensible spending.

When he began working as a computer technician decades ago, Jeff’s salary was just $13,000. So when the opportunity came to work extra hours, he jumped at it. His workweek went from 40 hours to 80 hours—and his income doubled in the process.

These days, the couple saves upwards of 25-30% of their household income for retirement. How? They don’t hoard money, but they also don’t waste it. They still shop at Walmart and buy $20 shoes. They’re just normal folks.

"It’s probably been five or six years since we’ve been millionaires" Jeff says. "But again, it didn’t change our lifestyle or what we did or how we did it."

To them, being a millionaire isn’t about hoarding your money. It’s about securing your future. It’s about leaving a legacy for your kids and giving generously. And it’s about enjoying the rest of your life without worry.

A few thoughts here:

• They didn't have a high income -- at least at the start. It doesn't say how much they make now, but $13k a year wasn't much, even many decades ago. So they had to have kept their spending low to create as much gap as possible.
• He worked hard. Working 80 hours a week is amazing. The article says he spent at the 80-hour mark too and when his time went back to 40 hours a week, he was in trouble. So the path to wealth wasn't a straight line for them.
• Saving 25-30% of your income is pretty good. Looks like they do it by being frugal when they need/want to be.
• Nice net worth growth if they just became millionaires six years ago and now have $2.8 million. Something is working! Just another illustration that the first million is the hardest. 

Overall they are a lot like the millionaires we interview here at FMF and have applied the same millionaire principles to become wealthy.

If they can do it, so can you!

Another Millionaire Couple with Average Income

Following up on You Can Build a Fortune on a Small Income, here's a piece from Dave Ramsey about a couple that didn't make a fortune but became millionaires. Some details:

Even though they didn't have a huge salary early on, the pair established their saving goals and then lived a modest, comfortable life year after year. In fact, their household income over the past two decades only averaged around $70,000.

But because they invested early and often, the power of compound interest began to seriously multiply their nest egg.

Becoming a millionaire doesn't take a silver spoon—it takes an iron will.

"You can build wealth," Shawn says. "It doesn't take a college education, and it doesn't take someone who has wealthy parents and inherits a lot of money. It's really about putting in the work, having a plan, and working together to make that a reality."

So let's review the facts:

• They had a decent but not a huge income.
• They were committed to saving as much as they could (they wanted to grow their gap to be as large as possible).
• They invested their money and saw it multiply.

As I've said, becoming wealthy is simple, but not easy. This means the concepts to growing your wealth are simple to understand (just those three points above) but not easy to implement (because it requires discipline, something the average American is lacking in spades.)

Anyway, consider this yet another example that you do not need to make a huge income to become wealthy.

That said, it is a lot easier to become wealthy the more you make. ;)

12 Habits of Millionaires

Money lists 12 habits of millionaires as follows:

1. Millionaires are super savers.
2. They get an early jump on building wealth.
3. They value hard work.
4. They invest for the long term.
5. They don't take crazy investment risks.
6. The majority seek out advice.
7. They value education.
8. They splurge but within reason.
9. Some aren't above serious economizing.
10. They shop at discount stores.
11. They tend to be planners.
12. They are givers and not gamblers.

Here's my take on these:

1. Got to agree that saving is a key part of building wealth. In the details of the piece, 58% say "saving early and often" was a top contributor to their success. That's because it gives compounding a looooooong time to work and time is the most important ingredient for investment success. FYI, 38% list "controlling spending" and "smart investment choices" as keys to success while 26% say "earning a lot of money" is a key. I guess they'd go for "saving" over "earning" in that debate.

2. Covered that issue above.

3. 95% say "hard work" contributed to their success. The other factors were: education (83%), smart investing (79%), frugality (78%), and risk taking (57%). This seems like the right order of priority for me as well.

4. Yes. If you "invest" then it's much better to go for the long-term view. If you need money soon, it's not good to tie it up in investments that could go down in the short-term (but will likely be up over the long haul).

5. 60% classify themselves as having a "moderate" risk tolerance. 22% say "aggressive". I'm probably in the moderate camp but have pushed the envelope a bit (mostly in my asset allocation which has always been heavy in stocks).

6. 62% rely on a financial advisor to help manage wealth. This is where I break from the pack. I am my own financial advisor. I do use professionals for things like taxes and estate planning, but I am in charge of the overall plan myself.

7. 86% say getting a college education is very important and 82% are college graduates. I would say the right education is important. I would NOT advise getting a $150k degree (and having student loan debt) for a job that pays $25k a year -- it just doesn't make financial sense. On the other hand, my MBA was probably one of the best money moves I've ever made.

8. 92% spent money on vacations in the past year. When our kids were growing up, most of our vacations were trips to see family. As they got older, we took some more expensive trips (one trip to Disney and three separate cruises). You can still save/invest even while spending on something expensive like a cruise, but you have to have moderate and selective frugality. In other words, you have to pick and choose what to spend big bucks on and reap your savings from the other things that don't matter to you as much.

9. Ok, I do three of the four things that they list as "serious economizing": using coupons, mow their own lawn (actually my son does it), and shop at Goodwill (FYI, we also shop at Costco, Walmart, and used to shop at Aldi when we had one in our city). Why not? Why pay more for something than you have to?

10. Now we get to the places that Money deems "surprising" to see millionaires shop at: Amazon, Walmart, and the like. Why is this surprising? Probably because all the Money editors who are not millionaires shop at Nieman Marcus and Saks Fifth Avenue.

11. I do have a to-do list (like 67% of millionaires), write down goals (like 67%), and network close to 5 hours a month (like 79%). It's the small things that add up over time and these do pay off if you use them day after day over the course of years.

12. 97% donate to charity (we do too) and 74% spent no money on gambling the past 12 months (neither did we).

In the end I match pretty closely with this list.

How about you? Which of these do you follow and which do you ignore?

How Big is $1 Million?

Ha! Here's an article from Dr. Thomas Stanley that hits on a few messages I have regularly addressed:

• $1 million is "not much these days." My contention is that it doesn't make you fabulously wealthy, but it makes you wealthier than most people.
• Financial journalists may know how to write about money, but they don't know how to manage it.
• Many "experts" advising you about managing your money aren't wealthy themselves and/or can't seem to take their own advice.
• Where you live has a BIG impact on how wealthy you'll become.

Here are some highlights from the piece along with my comments:

In an editorial in The New York Times, it was stated that:

A million dollars used to be a magic number, a sign of permanent affluence.  You made it!  But now it won't buy you . . . [the array then follows].

I have found that journalists have a tendency to discount the importance of "a measly million dollars."  Most of the journalists that I have come into contact with felt compelled to tell me that they are having a difficult time accumulating wealth.

I have noticed the same thing. People who are in the media writing about finances and yet are not wealthy themselves. They often leave little comments and clues that tip you off that they aren't the best money managers, but these are often passed over quickly so they can get back to their "great" advice.

The first person who blurted out in my presence, "a million, that's nothing anymore," was a young trust officer who "dressed rich."  Yet when asked he admitted [red faced] that his net worth was well below $1 million.  And I've been listening to this mantra throughout my career!  He is not alone, especially in the finance industry.  I find that most investment counselors who pan the million dollar figure are not very good at their craft.  Note that within the sample of 121 stock brokers/investment counselors profiled in my book,  The Millionaire Mind, "only 1 in 3 (34.4%) had a net worth that exceeded expected levels for those within the same age/income cohorts."  In contrast, for millionaire business owners, it was 77.4%.

Currently only about 8% of the 115M households in this country have a net worth of $1M or more.  If one of your children came home the last day of high school and said, "I graduated 8th out of 100 in  my class," you might likely be pleased.

Here's the number I've been looking for for so long. No, $1 million isn't what it used to be, but it's more than 92% of Americans have -- and that's pretty good in my book!

He then moves into a series of comments that demonstrates how $1 million really is a lot compared to the averages:

The median net worth of the household is $94,000.  This means that if you have just a $1M net worth, you are 10.6 times better off than the norm.  I'd call this meaningful! The median realized annual household income in the US is $53,000.  So again if you are at the $1M mark in net worth, you have the equivalent of nearly 19 times the typical household's income.

Then he gets into the cost of homes as well as the prices in one city versus another:

The meaning of having a $1M net worth is a function of the market value of the home/community in which you reside.   Currently in the US the median market value of a single family home is about $175,000.  You can buy 5.7 of these if you have a net worth of $1M.  Even better, move to South Bend, IN where the current sales price of a home is approximately $90,000.  With your wealth, you could buy 11 of these homes!  But if you insist on moving to San Francisco, the median price is nearly $870,000.

A few thoughts from me to wrap up:

• $1 million is "not much these days." My contention is that it doesn't make you fabulously wealthy, but it makes you wealthier than most people.
• Financial journalists may know how to write about money, but they don't know how to manage it.
• Many "experts" advising you about managing your money aren't wealthy themselves and/or can't seem to take their own advice.
• Where you live has a BIG impact on how wealthy you'll become.

Ha! I couldn't resist! :)

Ok, a few final comments (for real):

• Personally, I think $1 million in net worth is a good accomplishment. No, you're not going to retire in a castle with that amount, but there are those who could live quite nicely overseas or less nicely here in the U.S. on $1 million. It's not an insignificant amount!!!
• I remember when my net worth passed $1 million several years ago. I felt very good about that!
• The first $1 million is the hardest to earn. The second is much easier. The third even easier (or at least it appears it will be). One day I'll detail my specific facts for you to show the results. Anyone else able to testify to the same?

If there are any millionaires out there who haven't done a Millionaire Interview, I'd love to include you. Just drop me an email to get started.

So what are your thoughts on $1 million? Not much? A fortune? Or somewhere in between?

What We've Learned from Millionaires

I've completed 22 interviews with millionaires (here's the millionaire category in case you want to read them) and after the third one there were already patterns in their answers. So with all the responses we have now, I thought I would summarize what we've learned from this group with very high net worths.

Here are some common denominators:

Millionaires have high incomes. As a sample, here are the annual incomes of the last five millionaires I've interviewed (the ones who have shared a clear income number): $258k, $260k, $215k, $180k, and $230k. Yes, it's easier to have a high net worth when you have a high income. Haven't I been saying that since day 1 here at FMF? Millionaires know that their career is their greatest financial asset and they treat it as such, taking steps to grow and develop it much more than others.

Millionaires spend a fraction of their incomes. Here are the annual spending numbers for the five millionaires above (these numbers include giving, but not savings): $150k, $85k, $146k, $70k, and $85k. Notice anything? Yep, their spending is SIGNIFICANTLY below what they earn. It's no wonder they are wealthy, they are saving a TON of money every year! Also note that they are still spending a good amount each year, so they have a decent lifestyle. The lowest spender still spends $70k a year, which is a pretty decent standard of living.

Most have well over $1 million. While the cutoff to be interviewed by me is $1 million in net worth, many have $2 million or more. It's kind of what you'd expect given the income/spending numbers above.

They don't have exciting portfolios. Most invest in stocks/mutual funds and some have real estate. For the most part they are "boring" investors. This is likely what makes them successful -- they save a ton, put it away, and simply let it grow.

They have little to no debt. If they do have debt, it's a mortgage, but many don't have a dollar of debt. They save/earn money, they don't pay interest.

They are professionals. Business people, engineers, software developers, lawyers, and the like. Not many doctors though. Perhaps doctors don't read FMF. :)

They are self-made. None of them inherited a gazillion dollars. They simply grew their careers, spent a fraction of it, saved/invested the rest, and became wealthy. Again, it's the sort of thing I've been talking about here since this blog started.

Did I miss anything? Does anyone have anything else to add?

Thoughts on Being a Millionaire and Retirement

Here's an interesting piece from the NY Times that takes several views on being a millionaire:

They begin with the "a million dollars isn't what it used to be" argument:

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.

I'm not sure comparing something to an apartment cost in New York or what an NBA player makes for a good argument, but I get what they're saying. Imagine the difference today in having $1 million versus having $8.7 million. Big difference, right?

They go on to admit "while it's not the fortune it used to be, it's more than most people have":

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent.

The rest of the article notes how $1 million isn't the huge amount it may seem to be when it comes to retirement saving. The summary of their thoughts:

Consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds wants to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

A few thoughts here:

• I think the 4% rule has been de-bunked enough that it's not really reasonable even as a guideline, so I wouldn't put much weight on it. If anything, I think you need to plan to take LESS than 4% out.
• It would be nice to invest in muni-bonds and live off interest during retirement, but you need a whole lot of money to do that. That's why I think most retirees will need to invest in equities (at least to some degree) well into retirement.
• $40k could be supplemented with Social Security and working part-time and get a retiree up to an average income, so it's not the disaster the piece makes it out to be.

The article goes on a bit more, but here's a quote I found especially compelling:

“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

Yikes!

Scary, but true!!!

A couple final thoughts:

• Those who don't save enough will likely have a very poor retirement.
• The best retirement strategy IMO is one where you amass enough assets and then distribute them so that you can live off your savings alone and not spend and principal. This is the retirement plan I'm working on.

Comments?

Six Figure Interviews 9

Here's the latest in my series of six figure interviews, discussions with everyday people who have grown their incomes to at least $100,000 annually.

My questions are in bold italics and their responses follow in black.

Let's get started...

Tell us a bit about yourself (age, marital status, kids, where you live, etc.)

I am 30 years old, male, married, and without kids. My wife and I recently moved to a Midwestern suburb due to a job opportunity I had.

What do you do for a living?

I work as a software architect in a large corporation. Since we are not an IT company, my role is to design, plan, and implement software solutions for internal projects.

How much do you earn annually?
 
My base salary is $165K.

How does this amount break down (salary, bonuses, etc.)?

I am eligible for a 10% bonus. I have only been with my company a short time (about 6 months), so I have not received a bonus yet.

Do you receive any additional compensation/benefits from your employer (401k match, stock options, etc)?
 
I received a relocation package when I made the move; I also get 3.5% 401K match and discounted company stock. The 401K match vests after a year of employment, and I am required to hold all company stock for at least a year.

How long have you been working?
 
I graduated from college in 2005, and have been working full-time since then. So 8 years thus far.

How long have you earned at least six figures?
 
Since 2010, so for the past 3 years. I started out of college relatively underpaid at a $35K salary.

What have been the key steps you have taken that have allowed you to earn this level of income?  

My salary grew significantly as I took on additional responsibility and worked in a technical leadership role. Unlike many of my software developer peers, I focused on understanding the business needs rather than getting caught up with bleeding edge technology or “elegant” code. This led me to more customer facing roles, and eventually to an architect position.

In addition, I am told I have good communications skills, especially for a “techie” person. I think I am good at putting things in perspective and tackling problems accordingly, rather than letting knee-jerk reactions dictate the course of action. And, of course, I’m generally a hard worker and put in the extra hours when necessary.

Which of the following career advancing strategies did you employ (if any) and which were most effective: a. Doing well within your current company and being promoted. b. Jumping around from company to company always seeking a higher salary & responsibility. c. Entirely changing your career path from a lower earning field to a higher earning field (going back to school, etc).
 
B. Jumping around. There were certainly several positions that I expected to stay in longer, but things didn’t quite pan out that way.
 
Company 1 (3.2 years):

• Jun 2005: 35K
• Dec 2005: 36K + 1K bonus
• Apr 2006: 46K
• Jan 2007: 51K + 1K bonus
• Jan 2008: 56K + 1K bonus

Company 2 (1.2 years):

• Sep 2008: 70K
• Feb 2009: 87K

Company 3 (2.1 years):

• Nov 2009: 98K
• Sep 2010: 130K
• Apr 2011: 135K + 6K bonus

Company 4 (1.3 years):

• Dec 2011: 150K
• Jan 2013: 154K + 8K bonus

Company 5 (current):

• Mar 2013: 165K

A few notes:

• I was laid off from Company 1; the remaining job changes were all voluntary moves. That lay off was a huge blessing in disguise as I quickly discovered the kind of salary I could make.
• I almost went down the project management route during my time in Company 2. I am definitely glad that it didn’t pan out, since my technical skills are in much higher demand (and are stronger) than my PM skills would have been.
• I almost left Company 2 in Feb 2009, but decided to take a counteroffer. As I have learned, the counter wasn’t really worth it since I only lasted another 9 months.
• Company 3 started as a contract-to-hire role where I was making quite a bit less than the hourly rate that the company paid (I found out how much the contracting company was charging). I threw out the 130K requirement with little expectation of them agreeing to it, but apparently they wanted me as an employee more than I had anticipated. I had wholly expected to stay at this company longer, but changes in the organization had me looking elsewhere.
• Company 4 was easy work, well paying, but had nearly 0 growth potential.

What are you doing now to keep your income growing?
 
My latest role is quite a jump up in responsibility as I now have direct reports and have migrated from a position that was 80% writing code to one that is now 10-20% writing code. I hope to continue to build on this, and see where I can go within this company.

What are your future career plans?
 
In the 10-year horizon, I have multiple paths that I might go down. I want to stay on the technical side, since that’s where my strengths are. I’m hoping that can lead to a CTO role at some point for a small section of the business (not expecting to be a corporate-level CTO).

There’s another side of me that sees a form of early retirement and/or second career in my 40s. I enjoy what I do, but I would be okay with something that is less stressful and allows for more free time. I’m quite competitive though, so I’m not sure that if I built up my career further in the next 10 years, my ego would let me walk away from it.

Have you been able to turn your income into a decent net worth?
 
My current net worth is ~$500K. The vast majority of that is in several taxable accounts, since I have made many financial mistakes, one of which was not putting enough away in tax-sheltered retirement accounts. I will have to put together a Reader Profile at some point and get into more detail about that.

Why or why not?
 
I have always been a saver. However, I only recently became a bit more intelligent with the investment side of personal finance. I am still sorting through things and trying to line up all aspects of my portfolio at this time.

What advice do you have for people wanting to grow their incomes?
 
First, I will mention that I’m very fortunate to have a job that I enjoy and that pays well. I would highly recommend that the latter part is met, and that income is not the only focus. Even with early retirement options, most of us are stuck working for a good chunk of our lives so it’s far more tolerable if you enjoy that time.

My personal experience has been that it is beneficial to have an open mind and keep the big picture in focus. All companies suffer from short-sightedness, and it’s beneficial to have a vision at all levels of the corporate hierarchy. In my case, it was on the technology front to make sure that what we implement today isn’t shooting ourselves in the foot in the future. To go along with that though, make sure you know when to compromise as well. You will add little business value if it is ALWAYS your way or the highway.

Millionaire Interviews

I am in the process of moving this series from Wealth Lion to FMF. So here's the post that got it all started...

This blog is about how to grow your net worth.

To this end, I have been (and will keep) sharing the tips I've learned along the way, but I want to offer a broader perspective for my readers' sakes. Yes, I think I have something to offer, of course, otherwise I wouldn't spend the time running this site. But I'm certainly not the end-all expert on how to grow and manage wealth.

There are many ways to become wealthy and probably even more ways to manage wealth once you have it. So I wondered what voices could I add to mine to offer additional thoughts and tips on becoming and staying wealthy.

Well, there is certainly no lack of so-called experts out there. You can find them all over TV shows, on the radio, in print, on the web and so forth. But while many of these people know how to speak, write, and talk about managing money, they know it only in theory, not in practice. Yes, they know what to say and report on what to do, but they don't know how it really works. Why? Because they are not wealthy themselves. They spit out facts, but there's no insight, no extra tips, no real-life application because they haven't lived it themselves. No, these people would not add anything useful to the conversation.

Then there are the wealthy who have "made it" in some form or fashion. They are generally famous to some degree and most times have greater wealth than the average person could ever hope to attain (I'm talking $10 million+, and generally much more). They have started multi-million dollar businesses, are very talented in some way (sports, music, etc.), been in the right place at the right time, and so forth, and now are very wealthy. Yes, they certainly have something to share and their stories would be interesting. But since much of their results are not something the rest of us can replicate, I don't think adding their voices here would be as beneficial as I'd like. 

I prefer the everyday person. The one who started from nothing (or close to it) and became wealthy over time. The person who knows the ins and outs of growing and managing wealth because she's lived it. The person who is just like the rest of us -- a "normal", "regular" person, who we can relate to. And best of all, a person who has practical tips and insights that work in the real world -- ones that we all can apply to grow our wealth.

That's why I'm starting my "Millionaire Interviews" series. It will be a category here at FMF where I interview everyday millionaires. Here's how it will work:

• The interviews will be with people who have a net worth of at least $1 million. The levels of their wealth will vary and will be shared on each post. Some will have several million dollars to their names..
• I will ask them a series of questions and they will respond. They also have the right to add their own questions to the interview if they think I left out something important.
• As you might imagine, I want to keep the identity of these people guarded (to the extent they want to be guarded.) So I won't even use their initials in the posts -- I'll simply give them a number, starting at "1" and counting up.
• As you read each post, you can not only learn from them but also ask them questions. If they feel comfortable doing so, they will respond. I am guessing that some will and some won't.

These posts will hit at random. We may have a couple in one week and then none for a month or two. There's no set schedule. It's dependent, as you might imagine, on me finding millionaires willing to be interviewed. To that end, if you have a net worth of at least $1 million and are willing to be interviewed for this series, please drop me a line. We would all appreciate hearing your story.

So stay tuned. Millionaire Interviews will be coming your way shortly...

Top Ten Assets Owned by Millionaires

Dr. Thomas Stanley lists the top ten assets owned by millionaires (with the percentage of total wealth in each asset class) as follows:

1. Investment real estate (17.7)
2. Closely held stocks (14.5)
3. Publicly traded stock (12.6)
4. Retirement assets (11.4)
5. Personal residence (9.2)
6. Insurance (7.2)
7. Cash assets (6.9)
8. Limited partnerships (4.1)
9. Tax-exempt bonds (3.9)
10. Farms (3.1)

Just to be clear, the data is from "IRS' estate returns computed during 2007-2009 for those decedents who were under 70, married at the time of their deaths and had a gross estate of $2M or more." Just so we're all on the same page.

Here's how my top assets break down:

1. Retirement assets -- work 401k + rollover IRAs invested in Vanguard index funds
2. Investment real estate -- Two places (10 units) at the moment and working on more
3. Publicly traded stock -- taxable accounts invested in Vanguard index funds
4. Cash assets -- higher than normal now because I'm looking for a property to buy
5. Personal residence

All my other assets are negligible in value.

How about you? How do your assets break down?

How Millionaires Became Wealthy

Time recently highlighted a survey of multi-millionaires asking them how they became wealthy. The results:

• 27% are entrepreneurs


• 15% are corporate executives


• 7% are managers


• 6% are investors


• 6% are doctors and dentists

A few other key notes:

• 75% of wealthy entrepreneurs and business owners attribute their success to prudent risk taking. This group is also most likely to cite serendipity, or “being in the right place at the right time.” Just 58% of professionals including doctors and lawyers attributed their success to risk taking.


• 96% of professionals attribute their success to education while 81% of entrepreneurs feel that way. Professionals are also most likely to credit frugality as a significant factor in building their wealth. Nearly all (99%) corporate executives, meanwhile, cite “hard work” as a significant wealth creation factor.


• 80% say smart investing is a great way to join the millionaire’s club.

Some comments from me:

• I have grown my net worth through a combination of factors. First I was a "manager", and then became an "executive." Along the way, I spent less than I earned and saved and invested the difference to grow my wealth.


• I attribute a lot of my success to my education and rate my graduate degree as the main reason for my financial success.


• Of course, frugality is important as well. Without at least a degree of it, it's very difficult to significantly grow your net worth (which is why I list over-spending as the worst money mistake anyone can make). Of course you have to live and enjoy life as well, so that's why I practice moderate and selective frugality.


• "Hard work" is almost a given in wealth creation, isn't it? Very few become wealthy without it IMO.


• It's interesting to see so many say that "investing" is a way to become wealthy. I would see investing as part of another method, but I think few become wealthy with investing alone. Warren Buffett is the exception to the rule.

How about you? What has been the main reason(s) for your financial success?

How Do You Stack Up Compared to Millionaires?

Dr. Thomas Stanley recently shared some average financial figures from Millionaires Next Door (he wrote the book) as follows:

• The typical millionaire next door is 57 years old.


• The market value of the home is less than 20% of net worth.


• Debt totals the equivalent of less than 5% of net worth.


• Annual income tax is the equivalent of about 2% of net worth.


• Total annual realized income is approximately 8.2% of net worth [median], or the equivalent of $8.20 of income for about every $100 of wealth.

Here's where I stand on these measures:

• I haven't reached my 50's yet.


• Our home makes up about 7% of our net worth. This is because 1) we bought a house we could easily afford, 2) the value of our home has declined since we bought it, and 3) our net worth has gone up since we purchased the house 13 years ago.


• We have been debt free for over 15 years now (other than credit cards which we pay off each month).


• I haven't calculated income tax as a percent of net worth, but I would guess it's in this range.


• We are just about average in our income to net worth relationship.

How about you? How do the millionaires (or striving-to-be-a-millionaire) out there stack up to these averages?

How to Reach $1 Million

CNN Money recently ran a series on how to get to $1 million in net worth. They featured several articles, each purporting to help you accumulate $1 million on their own. The ideas: investing, owning rental real estate, launching a business, saving money, and climbing the corporate ladder. Each option came with a few suggestions to make the most of each method to get to $1 million.

Overall the tips were pretty basic and fairly weak IMO -- as well as not being very realistic. Not very many people can get to $1 million in net worth with just one of the ideas above. But used in combination they can make you wealthy. However that's not as much of an attention-grabbing headline. :)

If someone asked me how they could get to $1 million in net worth, here's what I would tell them:

• Start by picking the right college and the correct major. The "right" college is the one that maximizes the trade-offs between costs and benefits (with the benefit being career-long earnings). The "correct" major is one that you like (not love) that can earn you a great living.


• Cash in your degree to get a great first job with a brand-name company. I've told why this is important previously, so I won't repeat myself, but if you want details, see Five Steps to Six Figures in Seven Years.


• Work to maximize your career. It's your #1 financial asset, so growing it can have HUGE benefits to your finances.


• Earn extra money. Add to your career earnings by making money on the side. There are many ways to do this. For some of the most popular (and easiest) ways to earn some extra cash, see 11 Great Ways to Earn More Money and 7 More Great Ways to Earn More Money.


• Keep your spending as low as possible (enjoying life, of course, but not spending everything you have.) The combination of an ever-growing income and low expenses will increase the gap between the two -- and your gap is what you need to fuel your net worth growth.


• Invest your gap as soon as you can and for as long as you can. My investments are in index funds (including stocks, bonds, international stocks and the like) and real estate. Yours may or may not be the same, but whatever you do, develop a plan to make sure your gap money grows as much as it can.


• Avoid major money mistakes. You can take all the steps above and still derail your finances by making one (or a few) of the worst money moves anyone can make. Avoid them like the plague because they can be the death of your net worth.

If you take these steps over the course of many years (and repeat them again and again), you will become a millionaire. And it's likely you'll become a multi-millionaire eventually.

Anyone have anything to add?

Manage Your Finances and Think Like a Millionaire

My favorite personal finance book of all time, The Millionaire Next Door: The Surprising Secrets of America's Wealthy, lists the following seven common denominators among those who successfully build wealth as follows:

1. They live well below their means.

2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

3. They believe that financial independence is more important than displaying high social status.

4. Their parents did not provide economic outpatient care.

5. Their adult children are economically self-sufficient.

6. They are proficient in targeting market opportunities.

7. They chose the right occupation.

Here are my thoughts on these:

• I know you know what I think of spending less than you earn. I've mentioned several times that it's the best piece of financial advice I could give anyone.


• Yes, you have to spend time to make and manage your money properly. But it's generally a lot less time than most people assume. All told I probably spend a couple hours a month managing my finances.


• Put succinctly: millionaires don't worry about keeping up with the Joneses.


• My parents certainly didn't provide economic outpatient care -- they didn't have anything to provide. It will be interesting to see what we'll do for our kids as they get older. Will we be able to resist helping them financially (more than appropriate) when/if they need it?


• I don't think I'm proficient in targeting market opportunities (for instance, to develop a business of my own), but I certainly did choose the right occupation. Specifically, getting an MBA has been a goldmine for me!

After The Millionaire Next Door, Dr. Stanley wrote The Millionaire Mind. This book went a step further into (as you might imagine) the mindsets of millionaires and attempted to determine the traits they felt had caused them to be wealthy. Dr. Stanley distilled there success to these five things:

• Integrity -- being honest with all people


• Discipline -- applying self-control


• Social skills -- getting along with people


• A supportive spouse


• Hard work -- more than most people

Notice how these are simple concepts to define and understand, but they are not easy to implement. They require effort and determination, something that's in short supply among most Americans when it comes to money. That's why, IMO, most Americans are not doing well financially.

It's hard for me to honestly evaluate myself on these five factors, but of the group, there are three that I think have been a major part of my success to date:

• Discipline -- I have always been a pretty disciplined person, whether it's in academics, business, or personal habits. I generally use lists and measurement tools to help me achieve many of my goals and keep myself accountable. Others would likely call me anally retentive. :)


• Spouse -- As I've noted, my wife plays GREAT defense. She is even more frugal than I am (I know, you probably find that hard to believe, but it's true.) She fits the mold that Dr. Stanley talked about in Stop Acting Rich -- she's not interested in displaying our economic success. This is an awesome characteristic to have in a spouse because without it, you can be sunk. It doesn't matter what one spouse earns, if the other spends that much and more, the family's finances are doomed.


• Hard work -- I have always succeeded by hard work, not raw ability. For example, my intelligence is (IMO) a bit above average at best (even though I always tested well and was at the top of my class.) But my "secret weapon", what set me apart academically, was the fact that I was willing to work harder than almost anyone. I was willing to spend three hours (or more) studying every night of college when most others weren't. Then in grad school I was willing to spend five hours (or more) studying every night when most others weren't. In my career I've been willing to put in the extra hours and work as hard as needed to do a good job. And all that effort has paid off quite nicely.

I realize this can sound like bragging, and I really don't mean it that way. Believe me, I have a whole laundry list of stuff I could do better in all areas of my life. But fortunately Dr. Stanley doesn't have that list for me to comment on. :) Anyway, I'm simply trying to reinforce the fact that much of what he's said in his book has held true in my life. I'm sure there are others of you out there that have had similar experiences.

So what's your take on this information? Does it fit with what you've seen in life yourself or is there something missing? Give us your thoughts in the comments below.

A Story from a Millionaire Next Door

You all know how I love the book The Millionaire Next Door.  Well, here's an email I received from a good friend of mine recently -- a real millionaire next door. He had been reading around FMF and wanted to share his own personal finance story:

Our finance story. Married at 21, bought house at 25, mortgage rate of 14%. Refinanced three years later at 12%. Bought upgraded home at age 31. Resisted urge to buy McMansion on prestige golf course. Low ball offer with no waiting was accepted, saving $10,000. In four weeks, put $10,000 into home, and got home re-appraised for $20,000 more. Got home equity loan to cover the $10,000 in upgrades. (Wife hired maintenance men from her company to do the work on the side.)

Despite losing my job to disability, paid off home in eight years (yes, young people need disability insurance).

For last 14 years, we have maxed wife's 401k. The previous six years, we maxed my 401k. Our 401k's are worth $650,000 at age 50, plus $130,000 for college education.
 
In 1992, bought land for a second home for $12,000 + $7,500 in improvements. Never built house, which would have devalued land and sucked money. Land now worth $125,000.
 
We have a paid off house to borrow against as needed. We keep $5,000 to $20,000 on hand for vacations and home repairs and upgrades. We pay off credit cards every month.
 
So, even with my income crippled, saving for college, splurging on water-skiing and the massive gas-sucking SUV to pull the boat, we have net worth of $1.2 million.

Let's review a few things here -- what this couple did right to get them to such a great position:

• They bought disability insurance. My friend has had health issues for many years now and has been unable to work. But because they had disability insurance, he still has an income. I always say that we hope we never have to use our insurance, but if you need to, like in this case, it can be a HUGE financial lifesaver.


• They spent less than they earned. Of course they did -- how else could they save such a large amount? And not only for retirement, but they also have a good amount set aside for college (for two kids).


• They bought a house they could afford. Almost to a "T", they followed my formula for buying a house. And don't think they are living in a two-bedroom shack either. I have been to their home several times and it is quite nice.


• They paid off debt. Back when they bought a home (14% interest!), paying off a house was a no-brainer. That said, many people still didn't pay off their mortgage. This couple did. Now they are debt free and on solid financial ground.


• They got lucky. Ok, so there was a bit of luck here -- on the value of the land they bought. It's done a good job of appreciating (especially the way the market has been lately). Then again, they made a smart move by not developing it. 


• They enjoyed life. At the end he talks about how they like to water ski. They do (as well as snow ski too.) And they have a boat. Don't think for a minute that this couple has simply saved every penny at the expense of having fun. Quite the opposite. They were able to both save and have fun/enjoy life. Why? Because their gap was large enough to allow them to do so.

Those of you who are still working on millionaire status can learn a lot by following the example set by this couple. Those of you who are already there (or beyond), I know you can identify with them. And if you're willing, I'd love to hear your personal story of how you became a millionaire next door.

The Wealth of Auctioneers

Dr. Thomas Stanley (author of The Millionaire Next Door) recently noted that auctioneers are 10 times more likely to be millionaires than the average American. Why is this? Two factors -- high income and low expenses. Here's how Dr. Stanley summarizes it:

The combination of a high income and the low cost of living in a small town is a powerful force underlying wealth accumulation.

So they maximize their incomes and live in a low cost-of-living area, huh? Wow, wish I had thought of that. ;-)

He also adds an interesting insight into why auctioneers are careful with their money:

They are quite frugal in part because they see how little previously owned consumer products sell at an auction. Many auctioneers are also experts at appraising the value of certain assets.  They often leverage this knowledge when they invest. 

It makes sense. If you see items being sold day after day for a fraction of their "new" value, you probably wonder why anyone would buy these things new. Or, if you can get 40% off a few major purchases simply because you're in the right place at the right time, then that can save you a bundle -- especially over a 40-year career.

Three shows come to mind when I think of this situation: Pawn Stars, Storage Wars, and Auction Kings (yes, we watch them all.) They all have to do with:

1) knowing the value of items that have no official price tag associated with them (thus getting a good buy on them)

2) selling items for (hopefully) more than they are worth.

If you can do these things over and over again, you're bound to become wealthy. And auctioneers take advantage of both of these. They buy for themselves when they see a great deal (or can use their knowledge to save on purchases) and they make money (a commission) the more they sell an item for. Quite a good formula for wealth accumulation.

7 Life Lessons from the Very Wealthy

The Washington Post lists seven life lessons from the very wealthy as follows:

1. Having money is better than not having money. Money may not buy you happiness, but it buys many other important things. Like financial security, excellent health care, education, travel and a comfortable retirement. In a word: freedom.

2. Don’t become “cash rich” and “time poor.”

3. Memories are better than material objects.

4. Watch your “lifestyle leverage,” especially early in your career.

5. Having goals is incredibly important.

6. You must live in the here and now.

7. It helps to be incredibly lucky.

My thoughts on these:

• Of course having money is better than not having it. If it wasn't, who would read financial blogs? ;-)


• I have had times in my life where I was making a great salary but had no time for anything other than work. I was miserable. Thank goodness that I eventually (after a decade or so) found a job with a much better work/life balance. It has made a world of difference.


• We've previously discussed that experiences are generally rated higher than having "things". As a family, we're counting on adding to our experiences in the next few months by traveling to the Caribbean.


• IMO, you need to watch "lifestyle leverage" (and leverage of any kind), "spending creep", or whatever you want to call it -- throughout your career. Otherwise, you'll end up spending most or all that you make and go nowhere financially.


• You need to have at least basic, general goals. Specific, written goals are even better. After all, if you don't know where you're going, how will you get where you want to be?


• Living in the here and now is difficult for me, but something I'm working on. We can't spend out whole lives sacrificing only to find ourselves old, rich, and no physical ability to do anything -- what a waste. But it's often difficult in the daily grind of activity to stop and smell the roses.


• There's very little written about the impact of luck on personal finances -- probably because it's something that can't be controlled and planned for. But I know I have been incredibly lucky over the years, especially in the development of my career. Those of us who are spiritual often give God the credit for this "luck", but whether or not you believe good fortune is bestowed by a higher being, I think we all can agree that there are certain events in life that give some of us an extra break/boost.

That's my take. What are your thoughts on these?

Examples of How to Become Wealthy

My post titled Details on Millionaires generated a couple of comments from readers who I know are doing well financially. I thought I'd share their comments with you all since they were full of great advice.

Here's the first one:

At age 38 in approx 1998, 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 2.2~ to $2.4M. 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!

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 months and a trailer loan as a young AF officer that at $350~ a month (26 months) I recovered when I sold it. NEVER any other debt! THAT is the secret, ALWAYS live BELOW (well below) your means. Forget saving 10%, 15% minimum to up to 50% (after taxes) when you make the big ($500K+) income makes it happen!

Let's see: live below your means, don't go into debt, grow your career so you make a great income, and save a ton. Hmmm, sounds like I've heard those tips before. ;-)

Seriously, take it from this reader if you don't from me -- this stuff works!!!! And here's living proof that it does!!!!

Here's the next comment from another millionaire reader:

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 why my wife and I are living in a 2BR / 2BA condo 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.

Again: earning a good income, keeping expenses low to make your gap as large as possible, and saving a ton. It's a simple formula, and if you follow it over many years, you WILL become wealthy.

BTW, I have to echo the comments made by this last reader. I also read The Millionaire Next Door early in my post-college life. I started to apply its principles soon thereafter and the rest, as they say, is history. That book has made/saved me hundreds of thousands of dollars and that's why it's at the top of my best personal finance books of all time list.

How Millionaires Become Millionaires

After sharing Millionaire Facts, I ran into this piece from Yahoo Finance titled Wealth Is What You Save, Not What You Spend that talks about how millionaires became millionaires. How could I not post on something with this title? ;-)

Some of the quotes from the piece I just have to share (with my thoughts added in):

Most of those folks with a net worth of $1 million or more have earned it themselves.

Many people mistakenly think that most millionaires have their wealth handed to them from either their relatives or some stroke of luck (like winning the lottery, being gifted with amazing abilities/talent, etc.) This is completely false. Most people with over seven-figure wealth got it the old-fashioned way, they earned it.

Most of those with big bucks live well under their means and they put their money instead toward investments that help them stockpile more wealth.

This is why spending less than you earn is my best piece of financial advice. It's also the reason that over-spending is the worst money mistake anyone can make.

"It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes," the authors wrote. "Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline."

Some related FMF posts that you might like to read that support these claims:

• The Wealth of Farmers
• Intelligence Still Linked to Income, Not Wealth
• How Most Millionaires Become Wealthy

Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.

Simple math tells us all that it's easier to become wealthy with higher incomes (that's why I recommend growing your career and offer other money making suggestions as well.) But those who make more often spend more -- either treading water or even going backwards financially.

Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.

We paid for our last car with cash (and several before that), our last home with cash (from the sale of our previous home), and we don't want/need/have a boat. Of course I prefer to pay for anything by credit card, get the cash back, and pay it off immediately. ;-)

And they're patient, willing to invest in the long term and wait it out. "They stick with their investments and are more likely to have a financial plan," said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments. Many take the long-term approach to investing because they're working at being financial independent.

They "just so happen" to take advantage of the #1 way to grow their investments: time.

When it comes down to it, becoming wealthy is pretty simple: make your gap as big as possible and invest it for a long, long time.

Anyone working on this plan? I know you're out there. ;-)

Millionaire Facts

CNN Money has a piece that lists facts about millionaires. I thought I'd list some of their findings (in red) and my thoughts on them. Here goes:

About 7% of households have seven figures.

Whenever I write a piece about trying to become a millionaire, someone always makes a comment similar to, "Having $1 million is no big deal these days." Oh yeah? Well having $1 million puts you in the top 7% of net worths in the U.S. That sounds like a big deal to me.

14% of millionaires say their parents were wealthy.

In other words, the vast majority of millionaires didn't inherit their wealth.

My family was lower-middle-class for much of my young life (just me and my mom on a minimum wage salary), then middle class once my mom get remarried. But we were never, and they aren't now, "wealthy".

42% say they don't feel wealthy themselves.

I wonder what it takes to feel wealthy. I'm guessing a few million more than whatever you have. ;-)

How they got rich:

• 95% Hard work
• 83% Smart investing
• 81% Frugality
• 67% Risk taking
• 41% Luck

If I was listing these for my own life I would say:

• Hard work/education (see How I Made Millions Off a $5,000 Investment) which led to a great career  
• Saving early and saving often (see Time, Time, Time)
• Frugality/spending less than I earned (which really leads back to saving)
• Luck (mainly not having any major sickness and being "in the right place at the right time" a few times in my career)

90% college grads and yet only 5% law degrees and 3% medical degrees.

Think the MBA is bigger than the other post-grad degrees? I'm thinking so.

Median price of car: $31,400

Almost the exact price of the last car I purchased.

$39,300 -- the amount they save or invest annually.

This seems a bit low to me, though perhaps it's still a good percentage of their income. I save a good amount more than this each year.

61% say they "still have a great deal to learn" about investing.

I've condensed investing down to this: save as much as I can as soon as I can for as long as I can. Get decent returns on these savings by using index funds. So, is there a lot I don't know about investing? Sure. Do I really need to know anything more about it to be successful? Nope.

$13,000 average annual amount millionaires with up to $5 million give to charity.

Seems really, really low to me. Even someone with "just" $1 million should give more than this, shouldn't they? Then again, many of them likely pay high taxes and would say they "give" that way (though I don't buy that argument.)

How to Become a Millionaire in Three Easy Steps

CNN Money tells how to be a millionaire in three easy steps. It's a three-page post (or at least they've expanded it to that) that really boils down to making the most of these three factors:

• The time you have to save/invest
• How much you save/invest
• The return rate on your savings/investments

They go on to say that the longer you have to invest, the more money you invest, and the more aggressive (within reason) you invest, the faster you'll become a millionaire.

Wow, these guys are geniuses. ;-)

Yeah, pretty basic stuff. But they do make one point that I wanted to share with you all on a serious note -- this one about the impact of time on your investments:

When you think about getting rich, what jumps to mind? Saving more money? Getting that money to work harder for you? Sure, those are critical elements. But they're not nearly as important as time: How long you allow dictates how you pull the other two levers -- which is why you want to estimate your schedule before going on to the next sections.

I brought up the importance of time in investing in The Best Way to Maximize Your Investment Return, where I noted it was the one factor of the three that made the most difference in how your wealth would grow. BTW, #2 is how much you save. This makes return rate, the step most people spend the most time on, the least important of the group. So if people simply started saving more and doing it over a longer period of time (two factors they can influence much more than they can return rate), they would be much better off. Couple those with using index funds as your preferred investment vehicles (delivering you a good rate of return), and you've got a winning strategy.

CNN Money says (roughly) the same thing with this quote:

The single most important thing you need to know about building wealth: You're far better off being a dogged saver who's a mediocre investor than being a below-average saver who can knock the socks off the S&P 500.

Of course, if you can do everything well, then you're almost guaranteed to become quite wealthy.

The post does have an interesting chart that gives the odds of hitting $1 million in 20 years if you start with $250k and invest 60% in stocks and 40% in bonds given various annual savings rates. The results:

• Annual savings: $5,000; Chance of hitting $1 million in 20 years: 31%
• Annual savings: $10,000; Chance of hitting $1 million in 20 years: 43%
• Annual savings: $15,000; Chance of hitting $1 million in 20 years: 55%
• Annual savings: $20,000; Chance of hitting $1 million in 20 years: 67%
• Annual savings: $25,000; Chance of hitting $1 million in 20 years: 79%
• Annual savings: $30,000; Chance of hitting $1 million in 20 years: 91%
• Annual savings: $40,000; Chance of hitting $1 million in 20 years: 100%

With all this talk of saving $1 million, I know someone is going to say something like, "$1 million is not what it used to be" or "$1 million is not enough to retire on." So let me address these issues quickly:

• No, $1 million is not what it used to be. Nothing is what it used to be thanks to inflation. But $1 million still places an individual in the top few percentage points of all net worths in the US.
• Yes, $1 million is enough to retire on. Not a lavish retirement, mind you, but many people are retiring with far less than $1 million in the bank and are doing "ok."

Anyway, the key point here boils down to this:

If you want to become wealthy, invest as much as you can as soon as you can for as long as you can.

Yes, it's as simple as that!

Details on Millionaires

Get Rich Slowly has a great interview with Thomas Stanley, Co-Author of “The Millionaire Next Door” (one of the best personal finance books ever IMO) that has some really great quotes. I thought I'd share a few of them with you (in red) and give my comments on them. Here we go:

Income only explains about 30% of the variation in wealth. So they are doing something other than just making money and accumulating wealth via investments.

So again we see that having a high income is only partially responsible for making people wealthy (we've discussed this in Wealth Doesn't Require a High Income and The Wealth of Farmers.) In fact, income is less than a third of the reason that millionaires are wealthy. What accounts for the majority of their success? The fact that they spend less than they earn (regardless of their income.)

Every time I post on the fact that you can become wealthy by spending less than you earn, someone says something like, "Yeah, but you also have to have a high income." No, you don't. You need a "decent" income, of course (someone making $10k per year isn't going to become wealthy no matter how much they cut spending.) But you don't need to be making six figures to become wealthy.

And yes, I realize that people with higher incomes have a better opportunity of becoming wealthy. But as the statements above imply, many people don't seize this opportunity -- their spending simply rises as their income does. Unfortunately, this is more likely to happen (that even high income people spend all -- or even more -- than they make) than not happen in America today.

If you look at the statistics on happiness in life overall, those people who live below their means are happier than people who don’t.

Why is this? Is it because they've controlled their desires and are thus not always left wanting "more"? Or is it because they end up becoming wealthier and this leads to happy feelings? Thoughts?

The happiest people are the people who have substantially more money than most of the people that live in their neighborhood.

As we've discussed, relative income is a better predictor of happiness than absolute income.

The price of the house is a very high correlative of everything else that you spend money on.

In other words, if you spend a boatload on a home, it's also likely that you'll spend a boatload on all sorts of other expenses. People who want to grow their wealth understand this. And that's why in the United States, 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. For specifics, see Why Many Homeowners are Having a Tough Time.

Most people should not be in their own business.

Eliminates the myth that you have to have your own business to become wealthy.

There are a whole lot of folks out there in this country who are millionaires [but not self-employed].

Let me say from experience that you can certainly earn a great income without being self-employed.

Most millionaires are disciplined not only in terms of money, but also in consumption of food. We found in the correlations that weight is related inversely to health. Most wealthy people are not overweight. They are healthier than most people.

Let's face it, the reason many of these people is wealthy is because they are disciplined -- they control various portions of their lives (and can resist temptations) and thus become wealthy. This discipline carries over into other areas of their lives (like health/weight issues) in many cases.

Overall, it's great, great stuff from an author who I really admire. The Millionaire Next Door was one book I read and applied early in my post-college life. The results have been tremendous and for this I owe Dr. Stanley a great big THANK YOU!!!!

Wealth-Building Lessons from The Millionaire Next Door

Long-time readers know that one of my favorite personal finance books is The Millionaire Next Door. I read it several years ago when it first came out and have applied many of the principles it discussed. As a result, my net worth has climbed steadily throughout the years.

As a result, when Get Rich Slowly recently posted nine wealth-building lessons from The Millionaire Next Door, I knew I had to share their thoughts with you. Here are their nine lessons and my thoughts on each:

Lesson #1: Income Does Not Equal Wealth

So true. Yes, people with higher incomes have a better opportunity to become wealthy, but many waste it by spending all (or more than) they earn. Example: After 40 years, someone making $1 million a year but spending $1.1 million a year will be worse off (assuming the spending is on consumables) than someone making $75,000 a year but only spending $50,000 a year.

Lesson #2: Work That Budget

Most millionaires have budgets. Those that don't have developed the ability to spend below what they earn throughout the years.

We had a budget for the first 10 or so years of our marriage. But after that time, we were able to control our spending so much that we haven't needed/used one for years now. That said, I do check out actual spending versus past years in Quicken to make sure we keep ourselves under control.

Lesson #3: Know Where Your Dough Doth Go

Basically, millionaires know where their money is going. To me, this is really a restatement of lesson #2.

Lesson #4: Know Where You Want Your Dough to Go

Do you let your money go where it wants to go or do you tell it where to go (savings, investments, etc.)? If you do the latter, you're much more likely to be (or become) a millionaire.

Lesson #5: Time Is Money

How much time do you spend on your finances? Millionaires spend a "lot" relative to those who are not millionaires. That said, you don't have to spend 30 hours a week obsessing over your finances to become wealthy. If I don't count this blog, I spend maybe two hours a week managing my finances.

Lesson #6: Love the Home You’re With

As we've discussed, millionaires are much more likely to have an affordable home than a multi-million dollar one. And when they buy a house, they apply my formula for purchasing a home.  

Lesson #7: Love the Spouse You’re With

Two points here: 1. Divorce is expensive. 2. Spouses must work together to make a wealthy couple. In particular, if one is a spendthrift, it can sink their finances quickly.

Lesson #8: Don’t Drive Away Your Wealth

Lots of car stats here for millionaires:

• The majority of millionaires own their cars, rather than lease.
• Approximately a quarter have a current-year model.
• Another quarter drives a car that is four years old or older.
• More than a third tend to buy used vehicles.
• Toyota is the most popular car maker among millionaires.

Here's what I do:

1. I do buy new cars -- but drive them for several years. My last car was seven years old when I got rid of it. My wife's car is seven years old now.

2. I recently bought a new car -- a Toyota. My wife has a Toyota too. ;-)

Lesson #9: The Rich Are Different — They’re Happier

The key quote IMO: “Financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Yes, having financial security does bring a certain sense of "happiness."

The actual book doesn't have nine lessons -- it has seven factors. The ones that stand out to me the most (and some posts I've written on them) are:

1. They live well below their means. See: My Best Financial Advice: Spend Less than You Earn

3. They believe that financial independence is more important than displaying high social status. See: Why Do We Try to Keep Up with the Joneses?  

7. They chose the right occupation. See: Making the Most of Your Most Valuable Financial Asset and Five Steps to Six Figures in Seven Years  

And for those of you who like lists of "how to become wealthy", you might also want to check out Revisiting the Richest Man in Babylon. It summarizes another one of my all-time favorite personal finance books.

How Rich People Stay Rich

The book Smart Is the New Rich: If You Cant Afford It, Put It Down says that "rich people and wealthy university endowments stay rich and wealthy by following the following three rules":

1. Have the right asset allocation. That means the right mix of stocks, bonds, commodities, and cash.

2. Keep the fees to a minimum.

3. Rebalance the portfolio regularly to make sure that they have the appropriate asset allocation at all times.

The book goes on to say:

Fees are key. By Tuchman's math, if you are filling an IRA with mutual funds, you could be losing in the neighborhood of $1 million in fees over the course of a 41-year investment horizon.

My thoughts on these:

1. Yes, asset allocation is very important. For details, see The Basics of Asset Allocation and Asset Allocation Made Ridiculously Easy.  

2. I've been talking about the impact of costs for years. For specifics on how I keep fees low, see The Beauty of Index Funds.  

3. As I've noted, portfolio rebalancing boosts returns.  

These may be the ways people stay rich, but here is how they get rich: by spending less than they earn and investing the difference for a long period of time while avoiding the money mistakes that can kill your finances.

Key to Wealth: Tenacity

Here's a post from Dr. Thomas Stanley that says tenacity is common among self-made millionaires. The details:

Most self made millionaires rank high on the tenacity scale.  They report that this characteristic was developed in part during their secondary school and college experiences.  The majority (76%) of the millionaires I surveyed report that tenacity and hard work account for why they consistently achieve at a high level.  Plus, as I said in The Millionaire Mind:

. . .  people who are determined to succeed view all reversals as temporary and just as a required step to eventual success. 

At one time or another, most economically successful people have been labeled by some authority figure or some standardized test result as being "average" or "inferior."  But as the results of my research point out, such evaluations make these people all the more tenacious.  Some thrive upon such judgments, as they have made very clear to me. 

I think we've all had something or someone tell us "you can't do that." The difference between those who "make it" and those who don't is that the statements drive some people on to succeed (to prove the others wrong) while the statements push down others (because they believe them.)

A few more thoughts:

• Look at my piece titled The Difference Between the Wealthy and Everyone Else. One trait of the wealthy is that "they are competitive." Telling them that they can't do something just gets those competitive juices flowing.
• Next see What Makes Wealthy People Wealthy. On the list: "drive" and "confidence." Both are closely related to tenacity.
• Most people will have to be tenacious to become wealthy because the formula for wealth requires it. You have to spend less than you earn and invest consistently OVER TIME. This requires you to stick to the plan for at least a couple decades. If you do not, it's very likely you won't become wealthy.
• One of my biggest assets personally is that I'm determined/tenacious. I wasn't the smartest kid in the class, but I was determined to do well, so I spent more time studying. I wasn't the best employee from the get-go, so I worked harder. I wasn't the best this or that, but I compensated for it by wanting to be much better than I was, so I devoted time and effort to it. And so far, it's worked out well for me.

How about you? What's your take on tenacity? Do you have it or not? Is it a benefit or not?

Interesting Facts on Cars and Wealth

My recent posts titled My Recent New Car Purchase and Why I Buy New Cars spurred a lot of good discussion/comments. A few days after posting them I read some interesting stats on millionaires and car ownership from Dr. Thomas Stanley, the guy who wrote The Millionaire Next Door and Stop Acting Rich and I thought you all would be interested in hearing them.

Here's the first -- from his post titled Frugal Millionaire with a Mercedes? I (in red) along with my comments following each:

Of the four types of buyers, one stands out as the most frugal and most productive in transforming dollars of income into dollars of wealth.  On average their latest motor vehicle purchase represented less than 0.7% of their net worth. This group is referred to as the "used vehicle-prone shoppers."  Its members buy only used cars and/or are aggressive shoppers of vehicles offered by individuals as well as a variety of dealers, leasing companies, financial institutions, consignment companies, auction companies and agents, Internet listing sites such as Craigslist, etc.

I almost always match (or beat) what Dr. Stanley suggests when it comes to frugality, but on this one, as you know, I veer from my usual path. I like to buy new cars (see the link above if you want to know why) and keep them for a long time. I'm not saying that I recommend this for everyone (or even most people), but it's something I prefer to do and I'm financially able to do, so I do it.

Footnote: in Stop Acting Rich, millionaires (those with investments of $1M or more) paid the equivalent of only 1.4% of their investments for the motor vehicle they most recently purchased.

I was a bit higher than the 1.4% he notes here -- but not by much. I paid 1.75% of my net worth for my latest vehicle. So I don't feel too bad about that. ;-)

And here's a thought from his follow-up post titled Frugal Millionaire with a Mercedes? II:

Too many Americans may believe that by driving a new car they are emulating economically successful people.  But only 8.6% of those driving this year's model motor vehicle are millionaires [those with $1M in investments].  Don't ever feel degraded if you are riding around in a used motor vehicle.  

I don't believe that by driving a new car that I'm emulating economically successful people. In fact I pay very little attention to what other people drive (or do for that matter.) I pay more attention to what I like to do -- which is buy a new car and keep it for awhile. So I guess I'm among the minority 8.6% again, huh? But I'll only be for the next year. After that, I won't be driving "this year's model motor vehicle" any longer, of course.

How about you? What percent of your net worth did you pay for your last car? And are you driving this year's model? (I think I know the answer to that last question for most of you, but I had to ask anyway.) ;-)

8 Drawbacks of Being a Millionaire

MSN Money lists eight drawbacks of being a millionaire as follows:

1. Meet Mr. Tax Man. As a millionaire, you're going to be on the hook for doing a greater amount of (financial) good for your country.

2. It's like taking a second job. Possessions take time to maintain.

3. Meet the Joneses. Once you have the means to buy a bigger house, purchase a nicer car and join that nearby golf club, you're most likely going to meet a whole new group of people -- wealthier people.

4. 'But you shouldn't have!' Friends, family members, co-workers and employees begin to expect bigger, nicer and, well, more expensive gifts. 

5. They will come out of the woodwork. Having money will attract people who need or want money.

6. It's a roller coaster. As your portfolio value increases so, most likely, will your anxiety over market fluctuations that could quickly erode your net worth.

7. Whom can you trust? You will likely receive a steady flow of e-mail, snail mail and voice-mail offers from lawyers, investment advisers and tax attorneys all eager for your money -- or, that is, your "business."

8. You'll suddenly be less secure. As a millionaire, you are now a target for an unwelcome group of people: criminals.

A few thoughts on these:

• It goes without saying (though I'm going to say it anyway) that most people would prefer to have these "problems" over the (usually) much worse problems associated with not having enough money/financial resources. So it's really a "good problem to have."
• Yes, as you make more, you pay more in taxes. Welcome to America. If you like, you can choose to pay less -- just decide to earn less. ;-) Taxes are my #1 expense and I wouldn't mind paying them if I thought government officials were spending them wisely. But "government spending" and "wisely" rarely go together IMO.
• Yes, money takes time to manage. Hey, but what else would you do if you didn't read FMF for tips on growing and managing your net worth? ;-)
• Here's key #1 to many of these issues: keep your spending in check as your income increases. By doing this, your net worth will grow tremendously and you'll be able to avoid many of the money suckers (like an expensive home) that keep you from becoming wealthy.
• Here's key #2 to many of these issues: don't tell anyone how much money you have. If you do, people will expect nice gifts, want some handouts, try to rob you, etc. Just keep the fact that you're doing so well to yourself!
• Avoid following the stock market on a daily basis. I know what the market is doing IN GENERAL (up or down) every day, but I don't watch it closely.) I load my fund values in Quicken once a month (at the end of the month when I update my net worth) and that's the only time I look at specific valuations. If I followed the ups and downs of the market as closely as some of my friends, I'd probably have several ulcers by now.

How about advice from you millionaires out there? Any tips you'd add that will help people better manage a large amount of money?

How Most Millionaires Become Wealthy

Want to know how most millionaires become wealthy? Here's the key according to Smart Spending:

If you're like him (a millionaire), you'll accumulate your wealth gradually by diligently saving your money over multiple decades.

Said another way, I recently heard a radio host use this phrase about how to become wealthy:

Steady plodding brings prosperity.

Both statements are very true. If you want to become wealthy, the most tried and true way is to "save your money over multiple decades." Of course you can always speed up the process by earning more and/or saving more. But the key to becoming rich is pretty basic -- spend less than you earn over a long period of time.

For those of you who don't have the time and/or patience to become wealthy over 40 years or so, here are my suggestions for cutting "multiple decades" down to "two decades" (though technically, two decades are still "multiple" decades):

• Grow your career

• Control your spending

• Save/invest the difference (and the bigger the gap, the better)

Or you could simply plan on winning the lottery. But I hear that method is much less reliable. ;-)

America's Got Talent: When $1 Million Isn't As Much As It Seems

Some of you may think I'm a dunce (not that you don't already) for watching America's Got Talent (AGT). For three years now it has been my family's guilty summertime entertainment choice. We enjoy following the contestants through the process, seeing how America votes, and watcing Piers Morgan blast many of the particimants. Yes, now's the time when you can call me a dunce. ;-)

For those of you who have better things to do with your lives, you may not know that last night was the season finale of AGT. The final came down to soulful singer Michael Grimm beating opera sensation Jackie Evancho (who's 10-years-old, BTW). For those of you interested, here's Michael's last performance:

And here's Jackie performing with Sarah Brightman last night:

For the record, I think Jackie out-performed Sarah and should have won it all, but Michael is a great talent as well (just not as unique.)

Anyway, Micheal wins the $1 million -- which seems like a lot of money. So much so that he's planning on using it to buy his grandparents a new home. But wait a minute, he doesn't get $1 million all at once. Check this out:

The prize, which totals $1,000,000, is payable in a financial annuity over forty years, or the contestant may choose to receive the present cash value of such annuity.

In other words, the prize is like many lotteries: take a smaller amount of cash now, which over time will earn enough interest to make it worth the big amount, or wait for the full amount to trickle in over time as inflation makes each payment less and less valuable.

If we assume the annuity pays a fixed 5 percent interest rate, that would make the one-time payment worth $450,426. That, of course, would be subject to income taxes, so maybe the prize is worth $375,000, about a third of the advertised $1 million.

So that $1 million isn't really going to make him instantly wealthy and he's certainly not going to be paying cash for any home (unless he takes the lump sum -- but even then a home would suck up most of it.) Of course he'll likely go on to fame and fortune and make a boatload more off his music, he just isn't a millionaire today.

Nope, $1 million isn't always what it seems to be...

Cars Driven by Millionaires (And Me)

Here are some thoughts from the author of the Millionaire Next Door on car-buying habits of millionaires:

86% of those who drive prestige makes of motor vehicles are not millionaires [having an investment portfolio of $1M or more]. Also, I mention the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41,997].  It is understandable why so many people relate wealth with the price tag of a motor vehicle.  In a study of more than 2,000 respondents, The Wall Street Journal  found that 35% believed that in order to qualify as being rich a person must drive a car that costs $75,000 or more.  If I applied this $75,000 threshold to the millionaires whom I surveyed, more than 90% would fail to qualify.

A few thoughts on this issue as I start looking for a new car in the next month or so:

1. Leaves you with a different conclusion when you now see people driving a Lexus, Mercedes, or BMW, huh? ;-)

2. $31k is still a good amount to spend on a vehicle. I'm looking at all-wheel drive SUVs (to handle the Michigan winters and have room for our growing kids and friends) and I'm not sure I'm going to get that high. So people buying $40k vehicles would still be getting something "prestige" in my book.

3. I thought people reading the Wall Street Journal were smarter than that. $75k? Yikes!!!

4. I know that many of you are "buy quality used cars" buyers. Personally, I like a new car every seven years or so (100k miles) and I can afford it, so consider it one of the ways that I choose to spend/enjoy my hard-earned money. ;-)

And just to throw fuel on the flame of this issue, how about this as a debate question: should I buy, a Honda Pilot, Toyota Highlander, or something else? ;-)

Doctors Should be Wealthy

Remember our discussion of how the average farmer is more likely to accumulate wealth than the average doctor? That conversation had a few comments from people giving reasons why doctors weren't able to accumulate wealth like people in other professions. Yeah, right.

Check out this piece from Yahoo that lists the worst paying jobs for doctors as follows:

1. Family Practice - Average salary, 2009-2010: $175,000

2. Pediatrics - Average salary, 2009-2010: $180,000

3. Internal Medicine - Average salary, 2009-2010: $191,000

4. Family Practice with Obstetrics - Average salary, 2009-2010: $200,000

5. Hospitalist - Average salary, 2009-2010: $208,000

The piece also lists $140,000 as the amount of loans the average medical student owes at graduation. Consider all these numbers, I'd like to make the following comments:

1. These are the WORST paying jobs for doctors. That means that there are many, many other jobs for doctors that make these amounts at a minimum. Not bad. Here's a sampling from the article:

The typical orthopedic surgeon, who makes $519,000, or a urologist, who earns $400,000, according to the Merritt Hawkins data.

2. Even though $175k is the WORST an average doctor makes, it's still $175k!!! That's not a bad salary at all. Yes, I understand that, being averages, many doctors start out at salaries lower than these. But still, they're going to be making great salaries no matter how you look at it.

3. Couple the $175k salary with $140,000 in loans. It's not a great ratio, but it's not devastating either. It's equivalent to someone earning $25k having $20k in loans or someone making $50k having $40k in loans. These are certainly serviceable. It's far from the horror stories we often hear today where someone racks up $100k in debt for a job that pays $20,000 a year. In addition, there's a lot more discretionary income (more with which to pay off the loans at a quicker pace) when you're making $175k than when you're making $25k or $50k.

4. These are what the AVERAGES are. Is anyone striving to be average? How about working so that your income is above (or well above) the average while you college debt is well below the average. The piece tells the story of one guy who went to medical school courtesy of the Army. No debts for him other than having to serve four years once he graduated. One option: some small towns are paying off college loans to get doctors to come to their communities. And the government offers incentives as well.

5. Yes, there are exceptions. So please do not comment below that you know someone who has $140,000 in medical school debt and then went to work serving the poor for $25,000 a year. Those situations happen, but they are not close to being the norm. Furthermore, they violate a foundational principle -- borrowing too much for your anticipated salary. It's a noble cause to provide health care to the poor. But the person who wants to do this needs to figure out a way to do it without racking up so much college debt.

Yes, doctors have some extra expenses -- insurance in particular. But other than that, they shouldn't have costs that are that much more substantial than what the rest of us pay. As the original post claimed, I still believe that the main issue is that farmers are better controllers of their spending while doctors, on average, are not. As such, farmers accumulate more wealth over a lifetime.

It's pretty simple:

• Make $40,000 a year and spend $30,000, you're making financial progress each year.
• Make $175,000 a year and spend $185,000, you're going backwards financially each year.

No matter how you look at it, it comes back to following the basics. Implement them and you'll become wealthy. Violate them and you won't.

How to Make Your First Million

Investopedia lists ten steps to making your first million as follows:

• Stop Senseless Spending
• Prune Your Purchases
• Target Your Taxes
• Crafty Compounding
• Build Through Your Boss
• Ramp-Up Your Retirement Savings
• Incremental Investing
• Dare To Diversify
• Reconsider Real Estate
• Increase Your Income

Why do I get the idea that this list was written by a professional writer rather than someone who's actually wealthy? ;-)

To me, these steps can be summarized as follows:

• Control spending (steps 1, 2, and 3)
• Save/Invest (steps 4 to 9)
• Increase your income (step 10)

Or am I missing something?

I've grappled myself with how many steps it takes to become wealthy -- is it seven, five, three, two or one? In the end, I've settled on two simple steps to become wealthy:

1. Spend less than you earn
2. Do it for a long time.

Do these things and you'll not only earn your first million (which is the hardest to make), but be well on your way to multiple millions -- especially if you make the most of your most valuable financial asset.

Three Traits That Can Make You Wealthy

Investopedia lists six millionaire traits that you can adopt as follows:

• Independent Thinking
• Vision
• Skills
• Passion
• Investment
• Salesmanship

I agree that these are great traits and that if you have any of them (and the more you have, generally the better) you will improve your chances of becoming a millionaire. Then again, the people this series highlights as having these traits and being successful financially are Bill Gates, Warren Buffett, and Donald Trump -- not exactly a group that most of us can aspire to be in.

But luckily, we don't need to be in the company of these people (or have their traits) to become wealthy (and certainly not to become a millionaire.) In fact, I think there are only three traits anyone needs to have to become wealthy -- and most of us can muster up adequate amounts of these to be successful if we want to. My list:

• Ambition -- You have to have at least a decent income to become wealthy, and the higher it goes, the more likely you can become wealthy. Yes, some people can and have become millionaires while making $40,000 a year, but it's easier to do if you make $80,000 annually, now isn't it? ;-)
• Discipline -- I've said it a million times: no matter what you make, you have to spend less than that or you're going backwards financially. And to control your spending, you must have discipline. You have to be able to tell yourself "no" and sacrifice some things (like multiple, expensive vacations every year as an example) in favor of achieving a greater goal (becoming wealthy). IMO, discipline is THE key trait that separates the wealthy from the no-so-wealthy.
• Perseverance -- You have to be able to stick to a financial plan in order to be wealthy. There will be rough times (in your job, in your finances, etc.), but if you persevere through them, you can be wealthy despite the setbacks that most of us face during our lives. For sure there are some catastrophic events that can derail anyone, but even with those you will need to keep plugging to make the best of a bad situation.

So those are my three -- what do you think? Did I get any wrong? Miss any?

Giving is a Complement to Wealth, Not a Hindrance

Here are some interesting findings from Stop Acting Rich: ...And Start Living Like A Real Millionaire regarding giving and wealth:

Giving to charitable causes and wealth are complements, not substitutes, as logic might seem to dictate. Two groups of high-income producers were studied. Both groups were statistically identical in terms of income and age. The first group contained those who gave at least 10 percent of their annual realized income to charitable causes each year. The second group gave 1 percent or less. In terms of average dollars amounts [of net worth generated], the first group significantly outpaced the second [by about 20 to 1].

How is it possible that the group which donated significantly more money was able to accumulate more wealth? People allocate their dollars in ways they feel will give them the greatest satisfaction. I believe that these people feel that giving is a substitute for spending more on products and pleasure-related services. They seem to get more satisfaction from accumulating wealth and giving than from consuming more. If you spend a large proportion of your income on prestige brands of products, you have fewer dollars remaining with which to save, invest, or even donate. And those who gave 1 percent or less of their income to noble causes were, in fact, found to spend significantly more and invest much less than their more generous counterparts.

The more generous group was found to have spent fewer dollars on the impediments to building wealth: income taxes, homes, clothing and accessories, motor vehicles, mortgages, interest on personal loans, club dues, and vacations. Those who gave more also had a history of allocating more money to the foundation stones of accumulating wealth, including investments, pension or annuity contributions, and fees for professional financial advice and asset-management services.

Several comments on this:

• Wow, this guy is reading my mail. If you've been visiting FMF for any length of time, you know that this set of comments is pretty much in line with how I think about and manage money.
• Interesting that generosity and wealth accumulation go together, huh? I guess we were on to something when I noted that those who give also seem to do well financially.
• "I believe that these people feel that giving is a substitute for spending more on products and pleasure-related services." Has anyone seen Schindler's List? At the end of the movie Schindler is looking at all the material things he owns (a ring, a car, etc.) and wonders how many more people could have been saved if he had simply not purchased these (indulgences) and instead spent the money on rescuing people.

This is similar to how my wife and I feel about giving to help others. I say "similar" because this line of thinking can lead down a very slippery slope. You start with "we don't need a $500,000 home, we can have a less expensive home and help others with the difference" but taken to an extreme you end up with "why do we need any home -- why don't we live on the street and give everything to help others?" So there's a balance between sacrificing yourself/helping others and providing reasonably for your family as well as having extra to save and enjoy.

• But that said, why would we need to drive a Lexus when we're just as happy driving a Subaru and helping others with the difference? Why live in a $500k home (which we could afford to do) when a $170,000 (2,800 square feet, btw) house is just as good to us and allows us to give more? Why buy designer clothes so we can tell the world how wealthy we are when there are often less expensive alternatives that are just as good? Then we can give more to stop some of the problems in the world.
• There are people dying every day because they don't have enough food to eat, clean water to drink, the right medicines to take, and so on. I would prefer to "make do" (which really isn't making due -- I don't think I would enjoy the more-expensive alternatives any more than I enjoy what I have) and then give to help save some people from around the world rather than spend, spend, spend on myself.
• I'm not trying to make the above a guilt-trip for anyone or even saying that those reading should do the same. In fact, I'm acting in my own best, selfish interest. I'm doing something (giving) that gives me more joy than something else (spending on myself.) The joy of helping others is almost addictive, as you will find out if you ask anyone who likes to give (or if you're such a person yourself.) That said, I wish more people would discover the joy of giving versus spending more on "things."
• "They seem to get more satisfaction from accumulating wealth and giving than from consuming more." I've covered the latter above, but I just wanted to add that I do also get satisfaction from accumulating wealth as well. Call it independence, call it freedom, call it peace of mind -- name it what you will -- but there are a lot of great, intangible feelings associated with becoming wealthy that money simply can't buy. Oh wait, I guess money can buy them. ;-)
• We certainly spend less on things like homes, any sort of debt (we have none), club dues, and the like and more on investing, saving, and related activities. Yes, I practice what I preach.
• Wait! You mean "annuity contributions and fees for professional financial advice and asset-management services" are part of "the foundation stones of accumulating wealth"? Hmmmm. I don't spend anything on these (unless you include the low costs associated with investing in index funds.)

What about you? Does any of this ring true with your own giving/saving/investing experience?

You Don't Have to Earn a Very High Income to Be Wealthy, But It Helps

Later on in the book Stop Acting Rich: ...And Start Living Like A Real Millionaire the author makes a point about a group of millionaires who didn't have to earn a high income in order to become wealthy. He talks about millionaires who live in homes worth $400,000 or less (91% report they are extremely happy with life) and has this to say about them:

Most of the people who make up this low-profile millionaire segment never earned very high incomes. In fact, the median household annual realized income (from all sources) of this group was $113,334 at the time they first reached millionaire status. However, most people will never earn enough money to become wealthy and to be hyperconsumers at the same time. Do you want to become wealthy? If you do, you might want to follow the ways and means of this affluent group.

He goes on to say that the key to becoming wealthy is, as you might guess, spending less than you earn.

A few thoughts here:

• While it's not a fortune, $113k is nothing to sneeze at either. It's way more than most people earn.
• That said, the income certainly isn't "very high" as he notes in his first sentence. In addition, this is the income these millionaires had when they first became millionaires. This means (most likely) that they had salaries that were below this level that got them to millionaire status.
• Still, it's likely they had "good" salaries for much of the time on the road to millionaire-ville. That's why we not only need to keep spending under control but also make the most of our careers -- so we can maximize income. Yes, you can become a millionaire while you make $40,000 a year, or $60,000 a year, or $80,000 a year. But it's easier to do so if you make $120,000 a year, $150,000 a year, or $200,000 a year, right?
• Let's look at an example. If you earn $50,000 a year and save/invest $5,000 a year (using the "pay yourself first"/save 10% of your income guidelines) and it grows at 8% per year, you'll be a millionaire in 36 years. Looking at these numbers, you can see how someone making $75,000 then $90,000 then $113,334 a year could become wealthy well before 36 years, especially if that savings is matched in whole or part by something like an employer's 401k program.

How are you doing on the road to becoming a millionaire?

The Wealth of Farmers

Late last year I noted how the book Stop Acting Rich: ...And Start Living Like A Real Millionaire found that within the high-income population there's a negative correlation between occupational status and net worth. In other words, those that hold prestigious, highly-thought-of, respected jobs are the least likely to have high net worths. If you want additional details on why that is, read Why a High Income Often Doesn't Translate into a High Net Worth.

Today I want to share a few additional comments the book has on this subject:

You have a better chance of becoming wealthy if you do not try to emulate the consumption habits of those with high occupational status. Consider two of the occupational groups: physicians and farmers. High-income-producing physicians are heavily concentrated in and around cities. They tend to live in fine homes situated in pricey neighborhoods, drive expensive motor vehicles, dress well, patronize expensive stores, and hyperconsume in a variety of other ways. Most farmers, irrespective of income level, live and work in rural areas. They do not demonstrate their socioeconomic status by living high on the consumption continuum. This applies to most farmers, even those who produce high incomes.

Approximately 4 in 10 physicians have an annual realized income of $200,000 or more. That equates to almost 13 times the percentage for the total household population in America. Yet in spite of this large percentage being in the high-income-producing group, only about 1 in 10 is a millionaire and has financial assets of $1 million or more. However, for every farmer with a high income, there are nearly 2 (1.9) having an investment portfolio worth at least $1 million. Overall, this figure grossly understates their total level of wealth since the calculations exclude equity holdings in farmland, homes, livestock, and equipment. It takes only 53 high-income-generating farmers to produce 100 who are millionaires (FMF note: the other 47 millionaires come from non-high-income-generating farmers). But it takes 383 high-income-generating physicians to produce just 100 millionaires.

Many farmers are rich because they adhere to the basic rule for building wealth: Whatever your income is, live below your means. This is very difficult to do when you live in a high-occupational-status, hyperconsuming neighborhood that begets even more expenses. Move to Affluent Estates, live next to doctors, join country clubs. You will be mingling with hyperconsumers, but you won't likely be mixing it up with actual millionaires. If you want to hang out with truly wealthy people, then attend trade shows and conferences put on for farmers, scrap metal dealers, dry cleaners, engineers, and the like. Isn't it ironic that those who have the so-called highest status afforded by society, who live in the toniest neighborhoods, and who drive the nicest cars are ultimately not the richest?

Several comments on this one:

• As you might imagine, I love this book. He's singing my song. :-)
• Seriously, this is what I've been preaching here for five years now (and living for much longer than that). And it should be since the book that my finances are based on is the precursor to this book. I read The Millionaire Next Door a long, long time ago, started applying its principles, and have become wealthy over time. So it figures that I'd agree with what Stop Acting Rich has to say.
• IMO, the heart of the section above is that you must spend less than you earn over time. If you don't, no matter how much you earn, you will be going backwards financially.
• It's not lost on me that physicians not only spend more, but they live in cities, which are almost always more expensive than living in rural areas. Again we see that where you live can have a major impact on your finances.
• I know a couple doctors and they fit the description above almost perfectly. They (must) earn big bucks but they also are spending like crazy -- huge houses nicely decorated, very expensive cars, regular extravagant vacations, expensive hobbies, and so on. Sure, they are living "the good life", but I can't imagine they are accumulating much net worth. I also know many farmers (I grew up in a rural area). Most of the ones I know aren't rich, but their parents are. They own hundreds (or thousands) of acres of land, enjoy the "simpler things in life", and have stockpiled a good (I'm assuming from talking to them) net worth over time. No, not the most glamorous job in the world, but they like it and have done well financially too.
• This is not saying that everyone should (or would want to) be a farmer. The principle holds though: pick an occupation you enjoy, don't worry about "keeping up with the Joneses", and spend less than you earn. Do this for a long period of time, and you'll be wealthy. And of course, enjoy yourself along the way. Just because you spend less than you earn doesn't mean that you can't have fun with the money you do spend, now does it?

To answer his question, yes, it is ironic.

The First Million is the Hardest Million to Make

The following is an excerpt from Your Financial Playbook: A Guide to Navigating the World of Personal Finance.

Why does the 1st million seem so difficult to make? It’s the principle of compound interest that makes the 1st million the hardest million that you will ever earn. Here are a few examples.

• If you started with $100,000 and would like it to grow to $1,000,000 than you would need a 900% return on your money. ($100,000 + $900,000) = $1,000,000
• If you started with $10,000 and would like it to grow to $1,000,000 than you would need a 9,900% return on your money. ($10,000 + $990,000) = $1,000,000
• If you started with $1,000 and would like it to grow to $1,000,000 than you would need a 99,900% return on your money. ($1,000 + $999,000) = $1,000,000
• If you started with $100 and would like it to grow to $1,000,000 than you would need a 999,900% return on your money. ($100 + $999,900) = $1,000,000

As you can see it takes astronomical returns on your money to make $100, $1,000, $10,000 and $100,000 grow to a million dollars. Suppose that you already had $1,000,000 dollars and would like to turn it into $2,000,000 dollars. What type of return would you need to achieve that?

($1,000,000 x 100% = $1,000,000) You would need a 100 percent return in order to turn $1,000,000 into $2,000,000 dollars. A 100% return seems paltry compared to the returns listed above. So, what does all of this illustrate? This explains why it is easier for a millionaire to become a multimillionaire than for an individual with a few thousand dollars to become a millionaire. Remember it’s not impossible to become a millionaire just remember two simple rules.

1. You need to continually increase the amount that you are investing. The greater the amount that you are willing to invest can help lower the return needed to achieve your goals. Saving more money today means that you don’t have to chase high returns tomorrow. It’s better to be in a position where you can accept a 10% return on your money rather than chasing a 1,000% return.

2. You need to give yourself ample time to reach your financial goal. The principle of compound interest works best for you over longer time periods. All things being equal an individual that invests for 20 years has the potential for a greater return than someone who invests for 5 years.

Ha! Just like I said in Two Simple Equations that Lead to Financial Success.

TV Shows About How Rich People Got Rich

Over the past few weeks I've stumbled on two TV shows that are about how rich people got rich and I thought I'd share them with you all.

The first is aptly titled "How'd You Get So Rich?" It's hosted by Joan Rivers (warning: she's got a potty mouth, so be careful if you watch it with kids). She tells a short story of how a person became wealthy, but most of the show is a tour of the person's home -- complete with price tags that pop up telling you how much was spent on a table, painting, desk, or some other outrageously expensive item.

I have a couple comments on this series:

• The title of the show should be "How to Waste a Boatload of Money." Seriously, you wouldn't believe what people who have an almost unlimited amount of money spend their money on. It's almost sickening to me. (Then again, it's their money, so they have the right to spend it as they want.)
• It is interesting to see their homes. Even though so much of what is shown is way, way, way over-the-top, it's kinda like watching a train wreck happen -- you just HAVE to see (the house in this case)!

The second show is called "How I Made My Millions" and is more interesting to me. In this series, they tell the stories of how people became so rich -- they invented something, started a business, etc. The show tells people's stories from the beginning and shares all their trials in addition to their successes. I like watching these with the kids because each segment reinforces the facts that 1) many people get weathly because they WORK for it (wealth isn't given to them), 2) most wealthy people had times of adversity they had to overcome, and 3) they had to persevere to be successful -- three good messages for kids to learn IMO.

Has anyone seen either of these shows (or something similar)? If so, let the rest of us know what you think of them.

How Most Millionaires Become Wealthy

Here's a comment left on my post titled Millionaires Among Us that I wanted to share with everyone:

My parents, in their late 50s; dad's 401k was well over a million last I checked:

• did not start with any inheritance

• never owned a business; dad worked for 30 years doing software work at a telecom and mom stayed at home with the kids (8 of us) and is now a part-time teacher

• stayed out of debt, except for the 5-bedroom home (needed for all the kids) they bought at a good price and low rate many years ago. I remember their house payments were $239/month in the early 2000s.

• never buy new cars, only old beaters; dad rode the bus to work. Buy clothes at thrift stores. Buy furniture at thrift stores. Even stuff they buy new, dad finds the best price online, and they're pretty patient looking for good deals. Mom clips coupons, reads all the grocery ads, and shops at multiple stores to get the best overall deal.

• rarely ate at restaurants, never went out for coffee, and didn't buy things like snowmobiles. Pretty much avoided "luxury" things and status symbols. They did buy a used RV, which allowed the family to travel much more cheaply than it would have cost to stay in hotels.

• Total spending was maybe half or 2/3 of take-home pay; the rest was saved in tax-advantaged ways or put toward various charities. Would push giving onto one side or the other of New Years Day to take maximum advantage of tax laws and company matching. Did a lot of direct charity work.

Net result: work for a long time, be careful about spending, avoid debt, save a lot, and retire a millionaire.

Every time I see a story like this (and I see many of them), I am reminded that for most of us -- those who don't earn $1 million a year -- the path to wealth is quite simple. All we need to do is spend less than we earn for a long period of time -- and that will get us most of the way there. Sure, we may need to take some additional steps as well as avoid some financial pitfalls, but the heart of becoming rich is to live a life that's below your means and save and invest the difference.

Here's a quote from the book Stop Acting Rich that summarizes the situation quite nicely IMO:

Most people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households are unlikely to ever earn even $200,000 or more annually. Currently only about 3 percent of American households are in that category. So what if you will never hit the top 3 percent mark? What if you are unlikely to become rich by playing extraordinary offense (i.e., generating an extraordinarily high realized income), as the glittering rich do? The only way you will become rich is to play extraordinary defense like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.

Or, if you prefer, one from Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest:

Wealth doesn't require a high income. Most millionaires don't have million-dollar incomes. They accumulated their wealth the old-fashioned way -- by living beneath their means and giving their money time to grow.

We see this sort of story over and over and over again. If you want to read some additional pieces along these lines, check out my category devoted to millionaires. You'll see that the vast majority of these people got their wealth by taking the steps described above, not by earning a bazillion dollars a year.

And for those of you thinking it, I agree that a million dollars is not what it used to be. However, it's certainly much more than most people have/own.

Millionaires Among Us

The following is an excerpt from In The Trenches: Financial Survival During Times of Hardship. For more on millionaires and their financial habits, see What Makes Wealthy People Wealthy, The Difference Between the Wealthy and Everyone Else, Millionaires Tell How to Become a Millionaire, and "Real" Millionaires Different than What Media Portrays.

I have known three millionaires who were friends or family. These are my observations. Maybe you know some also and you can see if you agree or can draw your own conclusions.

1. Two of the three started with an inheritance. I don’t mean that their parents necessarily were dead. One built his first small house, with cash, on his parents land so had no housing expense until he built his own larger house with saved cash. The second became part of the family business. The parents of these two individuals did not wait until they died to help their grown children get a good start. In many ways this tradition has been replaced by parents paying for a college education that they hope will provide a greater earning potential. The third man was an immigrant who came to this country with nothing and first opened his own butcher shop and then landscaping business. This business eventually catered to the wealthy housing areas and commercial properties. It was funny that this little old Asian man in the dirty clothes and old truck had just as much money in the bank if not more than the people he served.

2. Two of the three owned their own business and then later businesses and land. These businesses where considered blue collar until their attention turned to investors. The one who worked for someone else had a stable truck-driving job that he held for 40 years.

3. All stayed out of debt and didn’t pay interest on purchases. Including businesses or houses. The story was often told of my uncle who totaled his car while on a trip. He went to the closest car dealer and drove home a brand new car that he paid for in cash.

4. All had nice newer cars that they maintained well. All also had a second car that was a utility vehicle that was dirty all the time and either very economical or functional depending on the primary use. Their nice cars were the “weekend” car.

5. None spent much on clothes. They wore their clothes out or continued to wear them after they were already mended and worn out. When they did finally break down and buy new work clothes they bought a dozen of the same kind of shirt to last the next 10 – 15 years. They did have a few nice clothes for social events and business meetings.

6. All bought their houses in cash after saving up to do so. They were conservative homes that they lived in most of their lives. They were not concerned about trading up though they did have the amenities they wanted. They maintained their homes well and didn’t worry about resale value because they did not plan to move.

7. All bought quality furniture that they kept for their lifetimes.

8. All ate very well but did not spend much in restaurants. They ate to live not live to eat. Their food was basic and they always had lots stored in the house. Usually 6 months to a year supply.

9. All negotiated prices on what they purchased and got it cheaper than the asking price.

10. None spent much on “stuff” or grown up toys. If and when they did take a vacation they could travel anywhere in the world but they did not have boats, snowmobiles, RV’s or other non essential things.

11. All had active social lives. This included barbeques in the backyard and bridge club. Once a year or so they would splurge and go out dancing.

Each of these men grew financially successful as the years passed. They were extremely hard workers who lived conservatively and were very practical. They enjoyed the simple things in life such as family and good food and didn’t get caught up in all the latest fads and popular activities.

There is nothing that any of these men did that the average person could not do if they choose to. So it wasn’t luck, the big break, or any other random act that caused them to be financially successful.

So here we have a landscaper, a truck-driver, and a sawmill worker who became millionaires. Is it really impossible or just a lucky break?

When Should Your Net Worth Reach $1 Million?

I get the comment regularly that "$1 million isn't that much money". Yes, it's true that being a millionaire is not what it used to be. In former times, if you had $1 million you were set for life -- and you lived very high on the hog for the rest of your life (and your ancestors probably did too.) But today, $1 million is just a pittance compared to what it takes to be really wealthy in 2010.

That said, $1 million is still relatively a lot of money -- and much more than most people have in their net worths -- even if you include the value of their homes (which some net worth trackers do not.)

For those people that say "$1 million isn't that much" (as well as for the rest of us), I have this question:

When should a person's net worth reach $1 million?

Because if we feel that $1 million is not adequate, then that implies some number above $1 million is what people should be shooting for. And if they're getting their net worths above $1 million eventually, then I would like to know when they should be reaching $1 million in net worth (so people can determine if they're on track or not.)

So should people reach $1 million by 30? 40? 50? Older? Does it depend on how much they ultimately want to have saved? Does it depend on their occupation or whether or not they own a business? Does it depend on something else?

Interesting question for you all. Have at it.

Ten Things Millionaires Won't Tell You

Smart Money lists 10 things millionaires won't tell you as follows:

1. “You may think I’m rich, but I don’t.” A recent survey by Fidelity found 46% of millionaires “do not feel” wealthy.

2. “I shop at Wal-Mart . . .”  Millionaires know what it is to be frugal. About 84% say they spend with a middle-class mindset, according to the AmEx/Harrison survey. That means buying luxury items on sale, hunting for bargains – and even clipping coupons. In fact, affluent households, including those with income above $100,000, tend to be heavier coupon users than those with lower incomes, according to a 2009 study by Nielsen and market research firm Inmar.

3. “. . . but I didn’t get rich by skimping on lattes.” So how do you join the millionaires’ club? One way is to run your own business. That’s how more than a third of all millionaires made their money, according to the AmEx/Harrison survey. Over a third had a professional practice or worked in the corporate world; only 5% inherited their wealth.

4. “I have a concierge for everything.”

5. “You don’t get rich by being nice.”

6. “Taxes are for little people.” Most millionaires do pay taxes. In fact, the top 1% of earners paid about 40% of total federal income taxes collected in 2007, according to the Internal Revenue Service. That said, the wealthy tend to derive a higher portion of their income from dividends and capital gains, which are taxed at lower rates than wages (15% for long-term capital gains vs. 25% for middle-class wages). Also, high-income earners pay Social Security tax only on their first $106,800 of income.

7. “I was a B student.” According to the book "The Millionaire Mind," the median college grade point average for millionaires is 2.9, and the average SAT score is 1190 — hardly Harvard material. In fact, 59% of millionaires attended a state college or university, according to AmEx/Harrison.

8. “Like my Ferrari? It’s a rental.” Why spend $3,000 on a Versace bag that’ll be out of style as soon as next season when you can rent it for $175 a month?

9. “Turns out money can buy happiness.” “There’s no group in America that’s happier than the wealthy,” says Taylor, of the Harrison Group. Roughly 65% of millionaires say that money “created” more happiness for them, he notes.

10. “You worry about the Joneses — I worry about keeping up with the Trumps.” Wealth may go a long way toward creating happiness, but the middle-class rich still can’t afford the life of the billionaire next door — the guy who writes charity checks for $100,000 and retreats to his own private island. “What makes people happy isn’t how much they’re making,” says Glenn Firebaugh, a sociologist at Pennsylvania State University. “It’s how much they’re making relative to their peers.”

I understand that Smart Money wants these pieces to have "shock value" and hence they push the limits a bit. But I believe they still want to be truthful. As such, I think they get some of these right and some wrong. Here's my take on the ten:

1. I think most of the millionaires don't believe they are "rich," at least not in the I-can-do-whatever-I-want-whenever-I-want sense of the word. I think they realize that they are certainly doing well -- and much better than most -- but they also realize that a million dollars isn't going to last 30 years into retirement.

2. Yep, millionaires shop at Walmart -- as well as other places that provide good prices. They didn't get wealthy by spending all their money needlessly (when they could get better prices elsewhere) after all.

3. Now they're bordering on the truth IMO. I don't think millionaires are looking at every single penny and avoiding spending at all costs. But I do think they look for value and are not spending willy nilly all over the place.

4. I think this is untrue. Mega-rich people may have concierges for everything, but the average wealthy person certainly does not.

5. This one is bordering on the truth. I think many wealthy people have gotten where they are by being ruthless, but I also think that just as many have become wealthy while being kind and fair.

6. Yes, wealthy people look for all the legal ways possible to avoid paying taxes. What's wrong with this?

7. As we've discussed, success in life is more about the person and his/her qualities, not what school they went to and what their grades were.

8. I think this is stretching the truth. Most wealthy people do not rent (or own) very many luxury items.

9. We've talked about money and happiness several times before, and my take is that money can make you happier to a point, but after that, more money doesn't increase happiness. That's the research I've seen at least.

10. I think most millionaires don't really "worry" much and certainly aren't concerned with trying to be The Donald. That said, they do have concerns about the economy, future financial issues (like healthcare), and the like.

Ok, so you may be asking, "What makes this guy think he knows more about millionaires than Smart Money?" A few things:

• Personal experience -- with myself, friends, and family that fall into this group.
• Reading about Millionaires -- books, web articles, etc.
• Writing about millionaires -- if you recall, I did several pieces on millionaires not too long ago.

In fact, here are some posts you may want to check out of you want more insight into what the average millionaire is dealing with, what he thinks, what he does, etc.:

• What Real Millionaires Do
• How to Become Wealthy
• Playing Good Defense is the Key to Getting Rich
• One Thing that Sets Wealthy People Apart 
• The Greatest Detriment to Building Wealth 
• How to Be Financially Comfortable 
• What Makes Wealthy People Wealthy 
• The Difference Between the Wealthy and Everyone Else 
• The Most Important Factors Making People Wealthy 
• Rich People Know that Things Don't Satisfy

What Real Millionaires Do

I'm done reading my copy of Stop Acting Rich: ...And Start Living Like A Real Millionaire and I'll be posting a bit on it here and there. But for now I wanted to share a general overview of the book's findings  regarding what real millionaires do:

Dr. Stanley’s research and the national survey carried out on his behalf by University of Georgia Survey Research Institute rips the lid off just about every assumption we have about who the really rich are (and aren’t), what they do (and don’t do) and what they buy (and don’t buy).

For example:

• The #1 most popular make of car among millionaires is Toyota--not BMW or Mercedes

• Real millionaires pay about $16 (tip included) for a haircut at a traditional barbershop

• Nearly 4 in 10 millionaires surveyed buy wine that costs around $10

• There are currently more than 350,000 millionaire educators (working or retired teachers or professors)--a profession that is far better at transforming income into true wealth than doctors or lawyers

• Only 5.7 percent of all millionaires surveyed nationally paid $1,000 or more for their most recently acquired suit

• Sixty-four percent of all real millionaires have never owned a second house – not even a rustic log cabin in the woods

• The proportion of Americans who owned boats in 2006 exceeded the proportion who left an estate of $1 million or more in 2007 by a ratio of nearly 5 to 1

• In the U.S., there are nearly 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

• The number one preferred brand of shoes worn by millionaire women is Nine West and their favorite clothing store is Ann Taylor--with the Gap and Costco not far behind

• Most real millionaires eschew Rolex, Omega and Tag Heuer timepieces in favor of Seiko watches

• Those who give away larger portions of their income to charitable causes end up accumulating more wealth.

Here's how I compare on these measures:

• I own a Toyota (as well as a Subaru.)

• I cut my own hair, so I'm well below the $16.

• I don't drink alcohol, so there's no wine for me.

• I'm not a doctor, lawyer, or an educator, bit that's fascinating information.

• I've NEVER spent $1,000 for a suit.

• I've never owned a second home.

• Ha! I don't own a boat.

• I'm not a millionaire woman, but I do shop at Costco. Does that count? ;-)

• My watch is a Casio, purchased at Walmart, and it works GREAT! (It does a very good job at keeping time during soccer matches.)

• Hmmmm -- giving related to wealth accumulation. Who would have ever guessed that? :-)

I hope you enjoy learning about this book as much as I did reading it. It's full of good, basic, wealth-generating tips and I plan on sharing them with you!

How to Become a Billionaire

Forbes recently looked at the lives of several ultra-wealthy individuals and came up with this list for how to become a billionaire:

• Their parents had a high aptitude for math.
• They were born in September.
• They were either college drop-outs or went to Yale.
• They worked at Goldman Sachs.

All strikes for me -- no wonder I'm not a billionaire. :-)

Forbes admits, of course, that its findings are very non-scientific. Though they are interesting to review, I doubt that they have any correlation with actually becoming a billionaire. In fact, other than "have a brilliant business idea, do it better than anyone else, and stick with it", there's probably not a whole lot of direction one can get for how to become a billionaire.

Becoming a millionaire, however, is something that's relatively easy to achieve. Simply follow the basics.

How to Be Financially Comfortable

The past two days I've talked about the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky. We reviewed the 20 factors that separate the wealthy from the not-so-wealthy and have detailed who the wealthy actually are and how that got that way. In this post, we'll discuss the second-highest financial level -- the Financially Comfortable. A few facts about them:

• They make up 27% of the US population.

• On average, they have investable assets of $240,000 -- a number that rises with age.

• They are even more likely than the wealthy to make and stick to a budget.

• Nearly 70% pay off their credit cards in full every month -- the rest either pay more than the minimum or don't use cards at all.

• 75% devote a chunk of household income each month to personal savings.

• 2% say money causes headaches in their lives.

So, with all these things going for them, why are they "only" financially comfortable? Why aren't they wealthy? The main reasons:

• They're less optimistic.

• They're less likely to take a risk at an advantageous time.

• They're less likely to reach out of that inner, familial circle to make a connection with someone who holds the keys to getting ahead.

My thoughts on these findings:

1. There's nothing wrong with being financially comfortable. In fact, the lowest "Financially Comfortable" person in this survey is better off than 70% of the US population. Not bad at all.

2. I'm guessing that they are more likely than the wealthy to make a budget because the wealthy have gotten to a point where they don't need it any longer to make sure they live within their means -- it's ingrained in them. We passed through the same stage. We used to monitor our budget very closely and update it each month. Now I make it out at the beginning of the year, refer to it at the half-year point, and that's it.

3. They're savers and they have high net worths. Not surprising at all. The keys to wealth aren't that difficult to follow.

4. I think the lack of stress due to money problems as well as the benefits of being optimistic are very under-rated in our society.

5. "They're less likely to reach out of that inner, familial circle to make a connection with someone who holds the keys to getting ahead." Sounds a bit like me. That's why I force myself to network regularly.

Stay tuned for more about this book. Tomorrow we'll cover the factors that doom people to the two lowest financial groupings.

What Makes Wealthy People Wealthy

Yesterday I talked about the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky. In particular I noted that the book broke survey respondents into four groups and listed the percentage each group was of the US population. Here they are:

• The Wealthy - 3%
• The Financially Comfortable - 27%
• The Paycheck-to-Paychecks - 54%
• The Further-in-Debtors - 15%

Today we're going to focus on the top group -- the Wealthy -- and detail who they are and what the difference is between them and the rest of the world. We'll start with the vital stats. On average, the Wealthy have investable assets (not including home equity) of nearly $2 million But the research also categorized others as wealthy if they had achieved the following wealth levels by various ages as follows:

• $1 million or more for ages 55 or older
• $750,000 or more for ages 45-54
• $500,000 or more for ages 35-44
• $250,000 or more if under age 35

How did they become wealthy? A few highlights:

• Most did not become wealthy overnight nor did they become so via inheritance, etc.

• Nearly nine out of ten said their wealth developed over time.

• They credit a combination of the Top Twenty (covered yesterday) including attitudes/attributes and habits (you have to have some of both).

So what are those traits and habits that made the Wealthy become wealthy? Here are the seven traits:

• Optimism
• Resilience
• Connectedness
• Drive
• Curiosity
• Intuition
• Confidence

And here are the four habits of the Wealthy:

• Work hard
• Save habitually
• Invest soundly and aggressively
• Give back

One final quote from the book before we get to my thoughts:

Interestingly, although the Paycheck-to-Paychecks and Further-in-Debtors are likely to blame their financial troubles on bad luck, the wealthy say they didn't get there by virtue of a lucky break. They got there by landing a good-paying job and sticking with it. Or by creating, as an entrepreneur, a good-paying job for themselves.

Now, a few comments from me:

1. The net worths they used seem right to me. If you have that level of wealth at those ages, you certainly are among the richest people in the US (not to mention the world.)

2. So many people are focused on how to get rich quickly. Again we see that the pathway to wealth takes time for the vast majority of people.

3. Interesting list of traits. If you didn't know what this research was about and were asked if someone with those seven attributes would be wealthy or not, you probably would say "yes." Seems fairly intuitive.

4. The financial habits look very similar to my three steps for getting rich. Funny how that worked out, huh?

5. Again we see that giving and being wealthy are related (FYI, giving also makes you happier.)

6. More proof that the difference between being wealthy and not being wealthy is how successfully you manage your career. Again, not new news to regular readers here, but it feels good to me to have some factual validation. :-)

Come back tomorrow and we'll meet the next-highest group, the Financially Comfortable.

The Difference Between the Wealthy and Everyone Else

I've been reading the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky. It's quite fascinating.

The skinny on the book is that a comprehensive survey was given to 5,000 people asking hundreds of questions in four main categories: financial attitudes and behaviors, goals, personality, and nonfinancial behaviors. The responses were then sliced and diced to try and determine what the difference was between those at the top of the economic ladder and those at the bottom.

The responses revealed that there are four main economic groups in America. I'll detail them more in future posts (especially the top group), but for now, here's the list and what percentage of the population they are:

• The Wealthy - 3%
• The Financially Comfortable - 27%
• The Paycheck-to-Paychecks - 54%
• The Further-in-Debtors - 15%

The survey tested for hundreds of factors to try and determine the difference that helped people rise to the top. And out of those hundred, only twenty were the ones that made the difference. They are:

Financial Attitudes and Behaviors

• They feel stocks are worth the risk.
• The devote money to personal savings or a 401k each month.
• They save regularly for emergencies.
• They have invested for retirement.
• They have reduced outstanding debt.

Goals

• They want to be financially comfortable during their working years.
• They aim to retire comfortably.
• They always knew what they wanted to do (for a career).
• They made it a goal to accumulate $1 million.
• They want to own a home.

Personality

• They are confident.
• They are happy.
• They are optimistic.
• They are competitive.
• They are leaders.

Nonfinancial Behaviors

• They have a college degree.
• They socialize with friends at least once a week.
• They exercise at least two to three times a week.
• They read newspapers regularly.
• They are married.

Now before you call it quits and decide that you can never do all 20 of these and thus are destined to a life of poverty, the good news found that you need, on average, ten of these factors (any ten) to make your way to financial comfort (the second-highest group) and twelve to make it into the very highest group (the wealthy.)

I'll be posting on this book for the next couple weeks, so we'll have plenty of time to dig into the details. But for now, let me make these comments:

1. I find this sort of stuff really interesting, especially given the breadth and nature of the research -- it appears to be top-notch and cover a sample size so large that it's bound to be pretty accurate.

2. Notice what wasn't in the list of 20? A high income. Yes, those in the top groups have high incomes on average, but a high income was NOT a factor that determined which group someone would fall into. Oh yeah, we'll cover this issue in depth in a later post.

3. Depending on how I grade myself (am I confident? happy?), I'd say that I meet 17 of these. The ones I don't are:

• They always knew what they wanted to do (for a career). I originally wanted to be a veterinarian. Then a lawyer. It wasn't until I was in my junior year of college that I decided on "business" as a field, and even then it took me a few more years to land in marketing.

• They socialize with friends at least once a week. If this means "go out with friends" or "have them over/go over to their house", we don't fit. But if it's more like "regularly see friends at various functions" we do (church, neighbors, volunteer organizations, soccer and basketball games, etc.)

• They read newspapers regularly. Depends on what "regularly" means. I read the Saturday and Sunday papers, though not very thoroughly. I get most of my news from the web.

As I said, there's much more to come from this book. If you want even more than what I'll provide, pick it up at your local bookstore or library. It's a good read IMO.