When you think of millionaires, what comes to mind? If you picture haute couture handbags, flashy cars, and bottles of Dom Perignon, you’re not alone. But you’re also way off the mark for spotting most millionaires.
The average American millionaire wears jeans and drives a Ford.
Yes, I’m serious.
Why is this information important? Are we going millionaire spotting later on? Is this like bird watching? Um, no – and no.
But knowing how most millionaires got to where they are – and following in their footsteps – is a smart move for people like you and me.
Luckily, following in their footsteps is easier than you think…
Millionaires get rich by being practical.
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy is a book revealing the results of an exhaustive study of more than 500 millionaires and 11,000 high-net worth or high-income individuals in America.
The book’s biggest bombshell? Most millionaires aren’t celebrities, tech founders, or investment bankers. They’re just goal-oriented, pragmatic people who live below their means and save as much money as they can.
Doesn’t sound very sexy, does it? Nope. But it does sound pretty damn doable, which is awesome.
Here are the practices that correlate with a seven-figure bank account balance:
Millionaires live below their means.
The formula is simple: spend less than you make, then save and invest the surplus.
This is how self-made millionaires accumulate wealth, and it seems like a no-brainer. But most Americans aren’t doing it – 55% of us either spend our full incomes or accrue debt by spending more than we make.
The result is an entire nation that lives paycheck-to-paycheck. The average household with credit card debt is a whopping $16,883 in the red and 40% of Americans can’t cover a $400 surprise. Our retirements are predicted to be even bleaker.
No wonder the gap between rich and poor is getting bigger. We’re literally spending our way into poverty.
The solution? Spend less. A lot less. The first step in amassing money is, well, having some money to amass.
Millionaires don’t spend money on status symbols.
Most millionaires aren’t keeping up with the Kardashians or keeping it real with the Real Housewives of Wherever. Instead, they’re skipping the shopping and simply keeping their money – in savings and investment accounts.
Almost every millionaire surveyed in the book feels “that financial independence is more important than displaying high social status.” Many talk about living modestly, dressing casually, and purchasing items for their quality and durability rather than their ability to impress the neighbors.
Case in point: our so-called jet set isn’t jetting around in any exotic cars. The makes preferred by America’s upper crust are Ford, Cadillac, Lincoln (specifically Town Cars), Jeep, Lexus, and Mercedes. Top-tier luxury vehicles don’t even make the list.
As one millionaire interviewed in the book put it:
“I just asked myself a simple question: Is the pride of new car ownership – and that’s all it is, pride – worth $20,000?”
A millionaire’s answer is no.
Millionaires have specific goals.
Do you clearly defined daily, weekly, monthly, annual, and even lifetime goals? Millionaires do.
The Millionaire Next Door finds a significant correlation between detailed goal setting and reaching millionaire status, even among those with moderate incomes. In other words, you don’t need to earn a mind-blowing salary to become a millionaire. You just need to be specific about how you’ll reach the milestones that lead to financial independence.
The book finds that goal setting often includes another trait of the affluent: financial planning. In fact, “there is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future.”
Do you know how much your stock index is currently worth? Are you putting away enough for retirement? Do you have a tax strategy? When was the last time you examined your finances to look for ways to cut costs? If you want to rub elbows with the upper echelon, commit to keeping a discerning eye on your money.
At least now you know how to leverage all that time you’ll save by not shopping, right?
Millionaires specialize – or work for themselves.
You don’t need a Wall Street career to get rich. Millionaires gravitate toward what the book’s authors call “dull businesses” – America’s financial elite are attorneys, dentists, and accountants.
But there is one distinction that sets the affluent apart from many of their colleagues, both in opportunity and revenue: specialization. Millionaire attorneys specialize in areas of study like intellectual property or immigration. Millionaire dentists don’t have general practices but instead focus on endodontics or maxillofacial surgery. And so on.
The book does confirm one commonly held belief about the wealthy: most of them are entrepreneurs. In fact, “self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires.” If you want to get rich, it’s time to finally start that small business you’ve been thinking about.
Millionaires find ways to pay fewer taxes.
What’s your biggest expense? Your rent or mortgage payment, right? Wrong. “Income tax is the single largest expenditure for most households,” says The Millionaire Next Door.
While most of see taxes as a necessary evil, millionaires invest substantial energy into optimizing their nontaxable income. This is where they do their smart spending.
While the average Joe is using TurboTax online filing tools, millionaires are partnering with a tax specialist and spending several hours each year finding and tracking deductions and exemptions. Yes, it requires more time and money to but the savings far outweigh the initial service fee.
Don’t believe social media – or celebrities.
A few generations ago, we believed luxury items were exclusive to aristocrats and royalty. But the 20-year economic boom we saw before the 2008 recession changed that – average American families started shelling out cash to buy custom homes, high-end automobiles, designer handbags, and Jimmy Choos.
Social media has exacerbated our spending, prompting housewives, “influencers,” and everyone in between to flaunt their label-laden lives. Now we’re a nation of impeccably dressed people who drive impractical cars to our oversized homes, then toss and turn all night because we’ve put away nothing for retirement. But you’d never know it from looking at our Instagram accounts.
The behavior we see from celebrities and professional athletes is no better. The Millionaire Next Door notes that “our youth are told that buying expensive items is normal behavior for affluent people. They are led to believe that the wealthy have a high-consumption lifestyle. They learn that hyperspending is the main reward for becoming affluent in America.”
One millionaire in the book referred to this phenomenon as the “Big Hat, No Cattle” problem. Many of us are so desperate to look rich that we spend all our money doing so, thereby impeding our own ability to actually accumulate wealth. The irony here is that you probably wouldn’t give a damn what your neighbors thought of you if you had a million or two in the bank.
So here’s the question: would you rather look rich or be rich? The choice is yours. Now go forth and live practically.
- A popular personal finance blogger who goes by the kooky name of Mr. Money Mustache often talks about the fact that millionaires are made ten bucks at a time. I don’t agree with all his advice, but this tidbit is true. It’s the repeated small purchases that can easily undermine all your saving.
- If you’re overwhelmed by how to get started with your retirement planning, read The Simple Path to Wealth by J.L. Collins. He breaks down all the basics into layman’s terms so you can quickly gain an understanding of how it all works. You can also follow his plan to the letter if you don’t feel like being creative, and then you’ll be all set to retire comfortably.