Regulars at the Palm with a bottle of champagne waiting on ice. Season stadium suite holders. Wardrobes by Saks Fifth Avenue personal shoppers. Mega-mansions with garages for Porsches and Corvettes. These are but a few of the lifestyle elements of millionaires, no?
No. Our image of the lives folks live with a two-comma net worth is highly skewed. (Hashtag Kardashian and Youtuber effect, anyone?)
Thomas Stanley, a writer and business theorist, used data to dispel these stereotypes in 1996 with his book The Millionaire Next Door. Yet, they persist.
Try this: Imagine Sam Walton, the founder of Walmart, driving around his hometown in a modest pickup truck. It doesn’t fit right with our conceptions, right? I mean, the Walton family could buy every US truck dealership over a weekend with a rounding error in their checkbooks. But it’s interesting how the concept of Mr. Walmart driving a regular car seems so unnatural.
When I was an intern at my first investment job, back in 1997, I read The Millionaire Next Door. It was a game-changer for many of its readers and me. It stripped away the idea that millionaires are only actors, sports stars, business luminaries and start-up gurus living in hedonistic excess. Stanley’s book talked about regular people who were millionaires but doing ordinary things with their money.
The Millionaire Next Door did something even more powerful – it made the concept of becoming a millionaire feel like an ascertainable goal for everyday Americans. And, that’s because it very much is.
Before we dive into millionairedom, remember three financial indicators for retiring sooner and happier, based upon research from my book. The first is to have your mortgage paid off before retirement. The second is to have at least three income streams (Social Security benefits, pensions, real estate income, retirement income, etc.). And, the third is to have a minimum of $500,000 in liquid assets.
Now let’s talk stats on “real” millionaires. Today we’re going into the nuts and bolts of becoming a millionaire.
The following data comes from millionairefoundry.com and help understand just how many millionaires there are across the globe and here stateside.
- Credit Suisse’s latest global wealth report: There are 46.8 million millionaires worldwide (measured in USD).
- Most are in the US: Of those, 40% or 18.6 million individuals are in America.
- Percentage of US: About 7.6% of the US adult population are millionaires.
- Percentage of American Household: The data indicate that approximately 14% of US households are in the millionaire club.
- Median Wealth: With a median wealth of $65,904 for an adult in the US, $1 million represents 1517% of the median.
- Cities: After the US at 40%, the following highest five countries for millionaires are China at 10%, Japan at 6%, the United Kingdom at 5%, Germany at 5%, and France at 4%.
- Percentage of World: If you’re a millionaire, you’re in the top 0.6% of wealth for the world’s population.
- Geographic: The nine cities with the most millionaires, in decreasing order, are Tokyo, New York City, London, Paris, Frankfurt, Beijing, Osaka, Hong Kong and Shanghai.
- Calculation: There is often debate on how to calculate how many millionaires there. The rub is whether to include equity in a home in tabulating millionairedom.
- New Per Day: Current projections are that 1,700 new US millionaires are made every day.
Now that we know that almost 15% of the American population are millionaires, let’s dig into some of the characteristics of this wealthy tribe.
- Education: According to Spectrem Group research, education is an important ingredient for millionaires – 84% hold a college degree.
- Saving: Another study from Spectrem revealed that, on a 100-point scale, millionaires rated the importance of having a regular saving program at 82, which reflects their strong belief in saving as remaining relevant to their wealth.
- Savings Rate: A study by the Harris Group showed that respondents save an average of 23% of their income.
- No Inheritance: Fidelity’s Millionaire Outlook Survey showed that 86% of millionaires said they made their own wealth; they didn’t inherit it.
- Started Poor: Research conducted by Thomas Corley of Rich Habits showed that 78% of millionaires started as middle- or low-income. Only 22% grew up in high-income families.
- Marathon Timeframe: On average, it takes a millionaire 32 years to hit the seven-figure mark, dispelling the notion that most “get rich quick” from a windfall. The same study showed that 80% of current millionaires didn’t hit the mark until they were at least 50 years old.
- Long Hours: The same research conducted by Corley showed that 86% of the wealthy who work full-time put in 50 hours or more each week at their jobs.
- Little TV or Web Surfing: Furthermore, 67% of wealthy folks watch less than one hour of television daily, and 63% spend less than one hour daily surfing the internet.
- They Want It: Next, desire matters. Fifty-three percent of self-made millionaires were keenly focused on becoming rich before they were rich.
- Multiple Streams of Income: Also, Corley’s research showed that millionaires often pursue numerous income streams. Sixty-five percent have at least three streams, thereby diversifying their dependence on any one stream. (Sound familiar?)
- Readers: Eighty-eight percent of self-made millionaires read at least 30 minutes every day, focusing their time on books about self-education.
- Exercise: Millionaires are also health-conscious, with 76% exercising four days a week.
- Married: Love and marriage. It just so happens that 86% of millionaires are married, including an impressive 65% who are in their first marriage, according to US Trust’s “Insights on Wealth and Worth.”
- Financial Planner/Advisor: According to Fidelity’s “Millionaire Outlook” study, 62% of millionaires rely on a financial planner to help them manage their wealth.
- Big Home Equity: According to research performed by Thomas Stanley for The Millionaire Next Door, these folks have significant equity in their homes. On average, their mortgage equals out to be for less than one-third of their home’s current value.
- Working vs. Non-working: Only 20% of this group are retired.
- Own a Business: Speaking of work, 66% of millionaires own their own business.
- First Generation: The Millionaire Next Door cites that the percentage of first-generation millionaires is 80%, again dispelling the idea that most millionaires are the product of a rich inheritance.
We’ve talked stats. We’ve talked traits. Now, let’s explore how millionaires think to better understand how they behave.
- According to a Spectrum whitepaper, 72% of millionaires believe “smart investing” is a key to their success.
- This is a critical point, as the whitepaper shows 48% of millionaires’ investable assets are in stocks.
- The same research also showed that 74% of millionaires are happy with their work/life balance.
- When this group takes a vacation, they spend less than you may expect, with 81% spending less than $10,000 on vacations for a year.
- And finally, millionaires may put their money in the stock market, but they keep it off the Blackjack table. The majority (74%) believe gambling is a waste of money and walk right past the casino on the cruise ship.
These facts and figures are fascinating in their own right, but you and I both know that stats don’t tell the real story. The journey to millionairedom is unique for every single one of these families.
Where do you fall on the wealth spectrum? Is it important for you to become a millionaire one day? Or are you aiming to hit the $500,000 happy retiree benchmark based upon your lifestyle? And, perhaps most importantly, how are you faring on your quest for financial wealth?
In The Millionaire Next Door, Stanley talks about Prodigious, Average, and Under Accumulators of Wealth. He shortens these three categories into acronyms – PAW, AAW, and UAW. (Here’s a spoiler – a PAW means you’re in the top 25% of net worth accumulators.)
The formula to determine where you are is straightforward:
- Multiply your age times your realized pretax income for your household from all sources except inheritance, then
- Divide this number by 10.
This is your wealth threshold. Now compare that to your actual net worth to see how you stack up.
If you’re two times your net worth, you’re a PAW. On the mark? You’re an AAW. One-half of the figure means you’re a UAW.
Here are two examples to bring this system to life:
Lilly, age 32, owns a vending machine business. She makes $100,000 a year.
- 32 x 100,000 = $3.2 million / 10 = $320,000
She has a net worth of $700,000, counting her savings, home equity, and business value. Her net worth is a little over two times the threshold, so she is a PAW.
Ben, on the other hand, is a 40-year-old surgeon. He makes $400,000 a year.
- 40 x $400,000 = $16 million / 10 = $1.6 million.
And, Ben has a net worth of $700k as well. But that’s half of his expected level. This surgeon is a UAW.
What seems to shine through from all of the data and figures is that millionaires live below their means, budget and spend time watching the outflow. Sixty-six percent spend time planning for the future and reconciling budgets. You don’t have to be a budget hawk, per se. Once a month is an excellent target point to sit down and dig into the numbers.
Now, while education is a key ingredient also, it is by no means essential. Over 80% of millionaires have a college degree, but there’s the 20% who don’t.
Millionaires are also savvy about taxes. They pay Uncle Sam less than you would think – their assets work for them, creating significant tax advantages. Remember that the number one highest-taxed dollar is one you earn as wage. Stocks increase with zero tax until you choose to sell. And, once you do, most capital gains tax is 15! That’s compared to the 37% our nation’s highest earners pay.
Now, what about kids? And I don’t mean having them. We’re talking about taking some of the money out of the millionaire pot to give to them. Does it help to create future millionaires? What’s your guess?
According to Stanley’s research, adult kids who receive money as they begin their working life earn about the same as those who do not. But get this – the “silver spoon” group accumulates only 47% of the wealth of their more self-sufficient counterparts. Remember, most Millionaires Next Door didn’t get money from their parents; they grew up in middle- to lower-income families. They are self-made, and giving adult children a financial booster shot seems to hurt more than it helps.
What does help is how these folks teach their kids about money. The Millionaire Next Door with successful children has typically done the following:
- Not told their children that they are wealthy.
- Taught their kids frugality and discipline no matter how wealthy they are.
- They made sure that their children don’t discover the family’s wealth until they have established mature and disciplined lifestyles and professions.
- Minimized discussions about inheritance or future gifts.
- Never used cash as a bargaining chip or to negotiate with kids.
- Stayed out of adult children’s family matters.
- Never try to compete with their kids. (Read as: Avoid phrases like “When I was your age…” or boasting about money accumulation.)
- Emphasized values beyond money, such as health, longevity, family, self-reliance, respect, honesty, achievement, and happiness!
So, there we have it. I think anyone would find it difficult to argue with the habits of Millionaires Next Door. The vast majority of these folks have created real wealth, not just income, but wealth for themselves and their families. Amazing.
Of course, every path to wealth is unique, and the bullet points above are but a guidebook. I’m sure every Millionaire Next Door could write a memoir about their journey, and no two would be alike. But themes would emerge, and these themes are the habits that Stanley identified 25 years ago with his breakthrough book.
Anyone can start their own journey towards wealth creation, no matter how far down the road of life you are. By incorporating and implementing some of the habits of Millionaires Next Door, who knows? You could join the ranks, too. Or at least change the way you think about money and wealth. Or better yet, motivate you to create changes to push up your retirement date! There’s nothing I love more than a story about early retirement with financial freedom. Are you writing that memoir? I hope so.