By Johann Grandia
Most people when asked to define their understanding of wealth I believe will have it all wrong. The general perception of wealth is; if you stay in an affluent neighbourhood, live in an expensive home and drive a luxury German car. But wealth is not the same as income. If you earn a good income each year and spend it all, you are not getting wealthier. You are just living high. The difference between wealth and living high and where most of us get it wrong is that; wealth is what you accumulate, not what you spend.
I want to focus on research by Thomas J. Stanley and William D. Danko, authors of the book The Millionaire Next Door. I do not want to spoil the book for those who have not had the opportunity to read it. However I want to give you an entrée into the seven characteristics that the authors believe provide insights into understanding of why almost eighty percent of America’s millionaires are first- generation rich. The seven common denominators among those who have successfully built wealth will be discussed next.
1.They live below their means
According to the research there are three words that profile the affluent: frugal frugal frugal. The word frugal can be defined as behaviour characterised by or reflecting economy in the use of resources. The opposite of frugal is wasteful, thus being frugal is the cornerstone of wealth-building. But why is it that many six-figure annual income households are not affluent? According to the authors they believe in spending tomorrows cash today. They are debt prone and are earn-and-consume treadmills.
2.They allocate their time, energy and money efficiently, in ways conducive to building wealth.
There is a strong positive correlation between investment planning and wealth accumulation. Prodigious accumulators of wealth (PAW) allocate nearly twice the number of hours per month planning their financial investments as under accumulators of wealth (UAW) do.
3.They believe that financial independence is more important than displaying high social status. You aren’t what you drive!
Evidence suggests that the typical PAW (see definition above) spent less than 1 percent of their net worth for their most expensive motor vehicle. The typical motor vehicle buyers spend the equivalent of at least 30 percent of their net worth for vehicle purchases. Further, on average, American consumers buy new motor vehicles at a price that is 72 percent of the most that a typical millionaire ever spent on a motor vehicle.
4.Their parents did not provide economic outpatient care.
Economic outpatient care (EOC) refers to the substantial economic gifts and acts of kindness some parents give their adult children or grandchildren. In general, the more money adult children receive, the fewer they accumulate, while those who are given fewer money accumulate more.
5. Their adult children are economically self-sufficient.
Parents with nonworking adult daughters and temporarily unemployed adult sons have a high propensity to provide these children with heavy doses of economic outpatient care. The more economically successful offspring are likely to receive smaller levels of EOC and inheritance. And lastly most highly productive sons and daughters receive no wealth transfers whatsoever and as discussed in point 4 that’s one reason why they are wealthy.
6.They are proficient in targeting market opportunities.
Those who are specialising in solving the problems of the affluent and their heirs should always be in great demand. This approach is known as ‘follow the money’. You need to consider businesses and opportunities likely to benefit from the affluent.
7.They choose the right occupation.
I saw an interesting presentation last year by Mike Rowe the host of the Discovery program ‘Dirty Jobs’. The presentation focused as does his program on many of the jobs that we as a society need but that not many of us have the stomach to do. What he wanted to highlight in his presentation was that although many of these jobs might be seen as degrading or reserved for the uneducated or low-income generating households, many of the business owners made significant revenues from it. And the discussion then continued to a well known quote: ‘do what you love and the money will come’. Unfortunately this statement does not always hold true, it is not always the extravagant businesses, the one you love that make the best investments. Many times it is the ‘dull’ business with the steady earnings growth, the business that none else wants to get into that over the long term provide the best investments.
I think it comes down to the following choice in life, do you want to be known as the person with the big hat but no cattle or the person that does not own big hats, but has a lot of cattle.