Foundation of Wealth Building - How ordinary people can become wealthy
Foundation of Wealth Building - How ordinary people can become wealthy
#First_generation_rich
#reference_country_and_money__AMERICA_&_American
Part (1/4)
Meet the Millionaire
“These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires—they don’t even have millionaire names. Where are the millionaires who look like millionaires?”.
The person who said this was a vice president of a trust department. He made these comments following a focus group interview and dinner that we hosted for ten first-generation millionaires. His view of millionaires is shared by most people who are not wealthy. They think millionaires own expensive clothes, watches, and other status artifacts.
We(researchers) have found this is not the case. As a matter of fact, our trust officer friend spends significantly more for his suits than the typical American millionaire. He also wears a $5,000 watch.
We know from our surveys that the majority of millionaires never spent even one-tenth of $5,000 for a watch. Our friend also drives a current-model imported luxury car. Most millionaires are not driving this year’s model. Only a minority drive a foreign motor vehicle. An even smaller minority drive foreign luxury cars. Our trust officer leases, while only a minority of millionaires ever lease their motor vehicles.
But ask the typical American adult this question: Who looks more like a millionaire? Would it be our friend, the trust officer, or one of the people who participated in our interview? We would wager that most people by a wide margin would pick the trust officer. But looks can be deceiving.
PORTRAIT OF A MILLIONAIRE.
♦ On average, their total annual realized income is less than 7 percent of our wealth. In other words, they live on less than 7 percent of their wealth.
♦ They live well below their means. They wear inexpensive suits and drive American-made cars. Only a minority of them drive the current-model-year automobile. Only a minority ever lease their motor vehicles.
♦ Most of their wives are planners and meticulous budgeters. In fact, only 18 percent of Millionaire couples disagreed with the statement “Charity begins at home.” Most of them will tell you that their wives are a lot more conservative with money than they are.
♦ They have a “go-to-hell fund.” In other words, They have accumulated enough wealth to live without working for ten or more years. Thus, those of them with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, They could live longer than that, since they save at least 15 percent of their earned income.
♦ As a group, they are fairly well educated. Only about one in five are not college graduates. Many of them hold advanced degrees. Eighteen percent have master’s degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.
♦ As a group, they believe that education is extremely important for themselves, their children, and their grandchildren. They spend heavily for the educations of their offspring.
♦ About two-thirds of them work between forty-five and fifty-five hours per week.
♦ They are fastidious investors. On average, they invest nearly 20 percent of their household realized income each year. Most of them invest at least 15 percent. Seventy-nine percent of them have at least one account with a brokerage company. But They make their own investment decisions.
♦ They hold nearly 20 percent of their household’s wealth in transaction securities such as publicly traded stocks and mutual funds. But they rarely sell their equity investments. They hold even more in their pension plans. On average, 21 percent of their household’s wealth is in their private businesses.
Millionaires and You
Who becomes wealthy?
Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life. This person owns a small factory, a chain of stores, or a service company or high income job.He has married once and remains married. He lives next door to people with a fraction of his wealth. Look at followings traits:
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.
8. He is a compulsive saver and investor.
Mainly, that building wealth takes discipline, sacrifice, and hard work. Do you really want to become financially independent? Are you and your family willing to reorient your lifestyle to achieve this goal? Many will likely conclude they are not. If you are willing to make the necessary trade-offs of your time, energy, and consumption habits, however, you can begin building wealth and achieving financial independence.
Part(2/4)
WEALTHY DEFINED
Ask the average American to define the term wealthy. Wealthy to them refers to people who have an abundance of material possessions. We(researchers) define wealthy differently. We do not define wealthy, affluent, or rich in terms of material possessions. Many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil/gas rights, or timber land. Conversely, those people whom we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.
THE NOMINAL DEFINITION OF WEALTHY
we define the threshold level of being wealthy as having a net worth of $1 million or more. (NPR 10 Crore or more).
A FOUNDATION FOR BUILDING WEALTH
It is unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles, and such. To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement.
What are three words that profile the affluent?
FRUGAL FRUGAL FRUGAL
Webster’s defines frugal as “behavior characterized by or reflecting economy in the use of resources.”
The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyperconsumption.
Being frugal is the cornerstone of wealth-building.
But the lavish lifestyle sells TV time and newspapers. All too often young people are indoctrinated with the belief that “those who have money spend lavishly” and “if you don’t show it, you don’t have it.”
Could you imagine the media hyping the frugal lifestyle of the typical American millionaire? What would the results be? Low TV ratings and lack of readership, because most people who build wealth in America are hard working, thrifty, and not at all glamorous. Wealth is rarely gained through the lottery, with a home run, or in quiz show fashion. But these are the rare jackpots that the press sensationalizes.
Many people who are not wealthy, know how to deal with increases in their realized income. They spend them! Their need for immediate gratification is great. To them, life is like a quiz show. Winners get quick cash and conspicuous gifts.
THE LIFESTYLE OF THE TYPICAL AMERICAN MILLIONAIRE
Traditional family values and lifestyle of hard work, discipline, sacrifice, thrift, and sound investment habits to reduce his spending in order to build wealth for the future.
What happens when you tell the average American adult that he needs to reduce his spending in order to build wealth for the future? He may perceive this as a threat to his way of life.
Here are some of questions asked to Jhonny ( a typical millionaire) about his purchasing habits.
“What’s the most you ever spent for a suit of clothing?”
Johnny closes his eyes for a moment. Obviously, he is deep in thought. Most people Expect him to say, “Somewhere between $1,000 and $6,000.” But research indicates that the expectations are wrong.
He said “The most I ever spent… the most I ever spent… including the suits I bought for myself and for my wife, June, and my sons, Buddy and Darryl, and my girls, Wyleen and Ginger …the most I ever spent was $399. Boy, I remember that it’s the most I ever spent. It was for a very special occasion—our twenty-fifth wedding anniversary party.”
According to survey, the typical American millionaire reported that he (she) never spent more than $399 for a suit of clothing for himself or for anyone else. Fifty percent or more of the millionaires surveyed paid $399 or less for the most expensive suit they ever purchased. Only about one in ten paid $1,000 or more; only about one in one hundred paid $2,800 or more. Conversely, about one in four millionaires paid $285 or less, and one in ten paid $195 or less for his (her) most expensive suit.
They are not interested in the fact that a suit with the same label was also worn by Dickens, de Gaulle, and Churchill. Nor do they care if your suits ever generate dividends or capital gains. But they can certainly ruin your investment portfolio of suits.
Then who purchases all those expensive suits? Our(researchers) survey has revealed an interesting relationship. For every millionaire who owns a $1,000 suit, there are at least six owners who have annual incomes in the $50,000 to $200,000 range but who are not millionaires. Their shopping habits certainly have something to do with the fact that they are not wealthy.
Who are these people?
Typically, they do not own their own businesses. They are more likely to be corporate middle managers (especially those who are part of a working couple), attorneys, sales and marketing professionals, and physicians.
THEN CERTAINLY FOOTWEAR
About half the millionaires surveyed reported that they had never spent $140 or more for a pair of shoes. One in four had never spent more than $100. Only about one in ten had spent over $300.
If not millionaires, then who is keeping the high-priced shoe manufacturers and dealers in business? Certainly some millionaires purchase expensive shoes. But for every millionaire in the “highest price paid” category of over $300, there are at least eight non-millionaires.
Note that only 1 percent of the millionaires in our survey paid $667 or more for a pair of shoes. Mr. King’s(a nonmillionaire) purchase of alligator shoes is rare even among millionaires. Nonetheless, the popular media enjoy touting abnormalities in buying behavior. As a consequence, 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.
Why does Johnny get ignored while Mr. King receives headlines? Because Johnny’s consumption habits are mundane. His rewards are more intangible than product-related: financial independence; discipline; and being an excellent family provider, a fine husband, and a father of well-disciplined children.
WRISTWATCH
Fully one-half of the millionaires surveyed never in their lives spent more than $235 for a wristwatch. About one in ten never paid more than $47, while about one in four spent $100 or less. Certainly some millionaires purchase expensive watches. But they are in the minority. Even among millionaires, only 25 percent of those surveyed paid $1,125 or more. About one in ten paid $3,800 or more. About one in one hundred paid $15,000 or more.
SO RARE THE JOHNNY
Why are so few people in America affluent? Even most households with six-figure (6 digit) annual incomes are not affluent. These people have a different orientation than does Johnny. They believe in spending tomorrow’s cash today. They are debt-prone and are on earn-and-consume treadmills. To many of them, those who do not display abundant material possessions are not successful. To them, nondisplay-oriented people like Johnny are their inferiors.
Part(3/4)
Is your spouse more frugal than you are?
PLAYING GREAT DEFENSE
The affluent tend to answer “yes” to three questions we include in our(researchers) surveys:
1. Were your parents very frugal?
2. Are you frugal?
3. Is your spouse more frugal than you are?
This last question is highly significant. Not only are the most prodigious accumulators of wealth frugal, their spouses tend to be even more frugal.
Most of these men play great offense in the game called income generation. Great offense in economic terms means that a household generates an income significantly higher than the norm.
Most of these households also play great defense; that is, they are frugal when it comes to spending for consumer goods and services. One frugal high-income producer within the married-couple category, however, does not automatically translate into a high level of net worth.
Something else must be present. A self-made millionaire stated it best when he told us:
“I can’t get my wife to spend any money!”
Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple cannot accumulate wealth if one of its members is a hyperconsumer. This is especially true when one or both are trying to build a successful business. Few people can sustain profligate spending habits and simultaneously build wealth.
HOW COME I M NOT WEALTHY?
Why aren’t you wealthy, you ask? Well, let’s examine your lifestyle. Is it one of great offense? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation? Be honest with yourself. Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires.
Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/outaccumulate those who outearn/have superior offenses.
“Their extraordinarily good offense compensates for a lack of defense and Vice-versa, in a game to Become affluent and stay affluent?”.
Income Against Affluent (Do all millionaires are high income Peoples ? No, read below)
The expectation is that the group would have an equally high concentration of high-income producers. Income is highly correlated with net worth; more than two-thirds of the millionaires in America have annual household incomes of $100,000 or more. In fact, this correlation exists for all major ancestry groups but one: the Scottish. This group has a much higher number of high-net worth households than can be explained by the presence of high-income-producing households alone. High-income-producing Scottish-ancestry households account for less than 2 percent of all high-income households in America. But remember that the Scottish ancestry group accounts for 9.3 percent of the millionaire households in America today. More than 60 percent of Scottish-ancestry millionaires have annual household incomes of less than $100,000. No other ancestry group has such a high concentration of millionaires from such a small concentration of high- income-producing households.
If income does not come near in explaining the affluence of the Scottish ancestry group in America, what factors do shed light on this phenomenon? There are several fundamental factors.
First, Scottish Americans tend to be frugal. Given a household’s income, there is a corresponding mathematical expectation of level of consumption. Members of this group do not fit such expectations. On average, they live well below the norm for people in various income categories. They often live in self-designed environments of relative scarcity. A household of Scottish ancestry with an annual income of $100,000 will often consume at a level typical for an American household with an annual income of $85,000. Being frugal allows them to save more and invest more than others in similar income groups. Thus the same $100,000 income-producing household of Scottish descentsaves and invests at a level comparable to the typical American household that annually earns nearly $150,000.
Charles Bobbins is a forty-one-year-old fireman. His wife is a secretary. They have a combined annual income of $55,000. According to our research findings, Mr. Bobbins should have a net worth of approximately $225,500. But he is worth much more than others in his income/age category. Mr. and Mrs. Bobbins have been able to accumulate an above-average amount of net worth. Thus, they apparently know how to live on a fireman’s and secretary’s income and still save and invest a good bit. They likely have a low-consumption lifestyle. And given this lifestyle, Mr. Bobbins could sustain himself and his family for ten years without working. Within their income and age categories, the Bobbinses are wealthy.
The Bobbinses are quite different from John J. Ashton, M.D., age fifty-six, who has an annual income of approximately $560,000. How much is Dr. Ashton worth? Is he wealthy? According to one definition, he is, since his net worth is $1.1 million. But he is not wealthy according to our other definition. Given his age and income, he should be worth more than $3 million.
With his high-consumption lifestyle, how long do you think Dr. Ashton could sustain himself and
his family if he were no longer employed? Perhaps for two, at most three, years.
The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.
We (Researchers) have discovered that several occupational groups contain large numbers of budgeters and planners.
Why are Mr. and Mrs. Rule millionaires today? Because Mrs. Rule plays tremendous defense! She is responsible for budgeting and spending for both her household and their business. Is anyone in your household responsible for budgeting? All too often the answer is “not really.” All too often people allow their income to define their budgets.
When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictable question: Why would someone who is a millionaire need to budget?
Our answer is always the same:
They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.
THE ANALOGY
Most people want to be physically fit. And the majority know what is required to achieve this. But despite that knowledge, most people never become well conditioned physically. Why not? Because they don’t have the discipline to just do it. They don’t budget their time to just do it. It is like becoming wealthy in America. Oh, you want to all right, but you play lousy financial defense. You don’t have the discipline to control your spending. You don’t take the time to budget or plan.
Note that under accumulators of wealth spend three times as much time exercising per month as they do planning their investment strategies.
Mrs. Rule is different. She’s like most millionaires. She’s disciplined. She takes time to plan and budget. This translates into wealth. Mrs. Rule’s household income varies from year to year. (It is typical to have ups and downs in their cash flow). Over the past five years her annual income averaged around $90,000. But her net worth keeps increasing. Today Mrs. Rule has a net worth of more than $2 million.
In our(researchers) survey, she answered “yes” to four questions about planning and budgeting.
QUESTION 1: DOES YOUR HOUSEHOLD OPERATE ON AN ANNUAL BUDGET?
QUESTION 2: DO YOU KNOW HOW MUCH YOUR FAMILY SPENDS EACH YEAR FOR FOOD, CLOTHING, AND SHELTER?
Almost two-thirds of the millionaires surveyed (62.4 percent) answered “yes” to this question. So did Mrs. Rule. But only about 35 percent of high-income-producing nonmillionaires answered “yes” to this question. Many of these high-income/low-net worth types have no idea how much they spend each year for such items as food consumed at home, food consumed away from home, beverages, birthday and holiday gifts (for each category of recipient), each category of clothing for each household member at each store, baby-sitters, day-care fees, line of credit use, charitable contributions, financial advice, club dues, motor vehicles and related expenses, tuition, vacations, heating and lighting, and insurance.
QUESTION 3: DO YOU HAVE A CLEARLY DEFINED SET OF DAILY, WEEKLY, MONTHLY, ANNUAL, AND LIFETIME GOALS?
The source of this question came from a decamillionaire whom we(researchers) interviewed a dozen years ago. He told us that he started a wholesale food business at the age of nineteen. He never finished formal high school but did eventually receive his high school equivalency diploma. We asked him to account for the fact that although he was a high school dropout, he had accumulated over $10 million. His response was as follows:
I have always been goal-oriented. I have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals, and lifetime goals. I even have goals to go to the bathroom. I always tell our young executives that they must have goals.
Her financial goal is to accumulate $5 million. Mrs. Rule knows how much she needs to set aside each year to attain her goals.
But is she happy? That’s a question very often asked of us regarding frugal millionaires. Will they then be happy? We don’t know, but we can tell you this:
Yes, she is happy.
Because one who will help them change their household environment from one of chaos and hyperconsumption to one of goal-oriented planning, budgeting, and controlling.
Financially independent people are happier than those in their same income/age cohort who are not financially secure.
Financially independent people seem to be better able to visualize the future benefits of defining their goals. Mrs. Rule, for instance, visualizes all her grandchildren graduating from college. She visualizes their success after college. She never sees herself being financially dependent on others, even if she is disabled in the future. Her goals are congruent with those of most millionaires in this regard.
QUESTION 4: DO YOU SPEND A LOT OF TIME PLANNING YOUR FINANCIAL FUTURE?
Although millionaires have much more experience in making investment decisions, they allocate significantly more hours than do nonmillionaires in an effort to become even better investors. That is one of the main reasons that millionaires remain wealthy.
Business owners like Mrs. Rule certainly have more freedom than people who are not self- employed. She can and does leverage her business knowledge with her personal investing habits. She can pick her area of business and the one she wants to study. Often employees don’t have this luxury.
But even among those who do have significant knowledge about excellent investment opportunities, many do not leverage this knowledge. Consider the following examples:
♦ A highly productive sales professional (we will call him Mr. Willis) had Wal-Mart as a client for more than ten years. All during this time, Wal-Mart was exploding in growth and value. How many shares of Wal-Mart did Mr. Willis, the six-figure-earning sales professional, ever purchase? Zero.
Yes, zero, even though he had considerable firsthand knowledge of his client’s success and an annual six-figure income. But he did purchase a foreign luxury car every two years during this time.
♦ A high-income-producing marketing manager, Mr. Petersen, was employed in the high-tech field. But he never invested a dollar in Microsoft or any other growth company. Never, in spite of having considerable knowledge about many of the firms in the technology industry.
♦ The owner of a printing business enjoyed having one of the leading beverage companies in America as a customer. The customer bought millions of dollars’ worth of printing from him annually. But how much money has the printer invested in his customer’s equity offerings? Zero.
In all three cases, the person makes a higher income than does Mrs. Rule. Yet none is a millionaire. In fact, Mr. Petersen, the marketing manager, has zero invested in stocks. He never invests any of his income. But he lives in a $400,000 home that is surrounded by others in the high-tech field who have big hats and bigger mortgages, but nocattle. Too many high-income/low-net worth types live from paycheck to paycheck, fearing a sudden downturn in our economy.
Part(4/4)
Fallacy of Rich
OUR FRIEND THE Under wealth Accumulator (UAW)
What motivates Theodore “Teddy” J. Friend? Why does he work so hard? Why is he driven to earn so much money? Why does he spend so much? Teddy will tell you it’s because he’s competitive. But so are almost all top-producing sales professionals. His competitiveness is not the most important reason for his behavior.
When Teddy was growing up, his family was among the poorest in a blue-collar community. His family’s small home was built from used lumber and similar discarded materials. Until Teddy was a freshman in high school, his father cut Teddy’s hair, which did save money, although, according to Teddy, most people could tell that his “head was worked on by an amateur.”
The public high school he attended attracted students from a wide variety of socioeconomic backgrounds. Many were from upscale homes. “Rich kids” were there in large enough numbers to fill the high school’s parking lot with their nice cars. These cars always amazed Mr. Friend. Throughout high school his family owned one automobile. It was a well-used Ford that his dad had bought when it was ten years old.
During his high school years, Mr. Friend made a promise to himself that someday he would be a lot better off than his parents. “Better off” in his mind meant having a nice home in an upscale neighborhood, fine clothes for everyone in his family, classy cars, club memberships, and items purchased in the best stores. Mr. Friend realized that “better off” could be achieved by finding a high- paying position and working very hard.
Never did Mr. Friend equate “better off” with accumulating wealth. Again, being “better off” meant displaying one’s high income via the conspicuous display of high-status artifacts. Teddy never gave much thought to the benefits of building an investment portfolio. To him, a high income was the way to overcome a feeling of social inferiority. A high income was the product of hard work. “Income in the form of capital gains” were foreign words to him.
Mr. Friend’s father and mother were dysfunctional when it came toputting money away for a rainy day. Their financial plan was very simple: They spent when they had money. They stopped spending when they ran short of money. If they needed something, such as a washing machine or a new roof, they saved for it. But they also bought many items with installment loans. They never owned any stocks or bonds. Never did Teddy’s parents set aside income for investment purposes. They did not understand or trust the stock market. The only real financial wealth the couple had was a small pension and the equity in their very modest home.
Today their son has a need to compensate for his “primitive blue-collar” background and his perceived educational deficiency. Mr. Friend never completed college. Even now he feels compelled to outperform all the college graduates against whom he competes. He will tell you that he enjoys dressing better, driving better, dwelling better, and, in general, living higher than all those “college kids” who operate within his territory.
Mr. Friend is the ultimate consumer. He has two boats, one jet ski, and six automobiles (two are leased; the others were purchased via credit). Interestingly, there are only three drivers in his household. He is a member of two country clubs and wears a watch that cost more than $5,000. He buys his clothes from the best stores. Mr. Friend also “owns” a vacation condo.
Last year Mr. Friend’s income was approximately $221,000. Given his age, forty-eight, what is his expected net worth? According to our wealth equation, his net worth should be $1,060,800 (expected wealth = one-tenth age x total annual income). What is his real net worth? Less than one-fourth of the expected figure.
How is it possible that Mr. Friend has an actual net worth that is less than one-fourth of the expected value? The answer lies in how Mr. Friend thinks. Wealth accumulation is not what motivates him. Interestingly, Mr. Friend firmly believes that if he were really wealthy he would not be a top- income generator. He has often stated that people who come from wealthy backgrounds have little motivation to excel in the workplace.
Mr. Friend has found a method to sustain and even enhance his drive to perform at high levels. He has found that fear is a great motivator. So he buys more and more via credit. By increasing the amount he owes, he correspondingly increases the accountant’s fear of default. In turn, this increasing level of debt-based fear encourages him to workharder and more aggressively. To him, a big home is a reminder of a big mortgage and the need to perform at a high level.
Mr. Friend is not a big spender across all categories of products and services. Ask him how much money he allocates for financial advice. In this category he is very price-sensitive. For example, his choice of an accountant was based almost exclusively on the accountant’s fees, not on his quality. Mr. Friend has always believed that the quality of service that accountants deliver is about the same; only their fees are different. That’s why he picked an accountant who has low fees.
In sharp contrast, most wealthy people feel that you get what you pay for in the realm of financial advice.
Mr. Friend spends a considerable amount of time working. Still, he constantly worries that he will lose his so-called competitive edge. He is concerned that his need to outperform the rich kids, the college graduates, will wane someday. Mr. Friend constantly reminds himself about his humble background and lack of that all-important college degree. He constantly punishes himself psychologically. In his eyes he is inferior in pedigree to those very confident college graduates against whom he competes. He often wonders how they can be so content, given their less-than-exceptional performance in the workplace.
Mr. Friend never really enjoys his life. He owns a lot of upscale things, yet he works so hard and for so many hours during a typical day that he has no time to enjoy them. He has no time for his family, either. He leaves his house each day before dawn and rarely returns home in time for dinner.
Would you like to be Mr. Friend? His lifestyle is appealing to many people. But if these people really understood Mr. Friend’s inner workings, they might evaluate him differently. Mr. Friend is possessed by possessions. He works for things. His motivation and his thoughts are focused on the symbols of economic success. He constantly needs to convince others of this success. Unhappily, he has never convinced himself. In essence, he works, he earns, and he sacrifices to impress others.
These factors underlie the thought processes of many under accumulators of wealth. More often than not, UAWs allow “significant others” to determine their financial lifestyle. Interestingly, these “significant others,” or reference groups, turn out to be more imagined than real. Are you motivated by “significant others”? Perhaps you should consider a different approach to life. Perhaps you should reorient yourself.
Are all high-income people who came from humble beginningsdestined to become UAWs? Will they all turn out to follow the ways of Mr. Friend? Absolutely not. There is a fundamental reason beyond Mr. Friend’s perceived social and educational deficiencies that explains why he became a UAW: His parents taught him the ways of the UAW. In spite of their modest income, his parents were not frugal. They spent nearly all their income. They were professionals in expending resources. Any pending increase in income was immediately earmarked for consumption. Even anticipated income tax refunds were allocated for consumption—long before the checks were received. Their consumer behavior had an impact on their son. They constantly sent him a message:
One earns to spend.
When you need to spend more, you need to earn more.
LIFE AMONG FRIENDS
How did Mr. Friend’s parents spend their money? He told us that throughout their marriage they ate a lot, smoked a lot, drank a lot, and shopped a lot. Their household was always overloaded with food. They stockpiled snack foods, prime meats, cold cuts, ice creams, and other desserts. Even breakfast was a feast. Bacon, sausage, home fries, eggs, English muffins, and Danish pastries were basics in the morning. Steaks and roasts were the preferred dinner offerings. The Friends never skipped a meal. Neighbors and relatives were frequent guests at the “Friends’ Restaurant,” as they referred to their home. Mr. Friend’s parents, between them, smoked about three packs of cigarettes a day. During a normal week they consumed two cases of beer. On holidays, consumption of food, tobacco, and alcohol greatly increased.
Shopping and consuming were the Friends’ main hobbies. More often than not, they shopped for fun, not necessity. On most Saturdays they would shop from the early morning until mid-afternoon. First they shopped for food. Then they spent countless hours shopping in discount stores. Mr. Friend pointed out that “most of the stuff they bought was junk.”
His mother was an especially aggressive discount store shopper. She had a strong proclivity for purchasing large quantities of throw rugs, ashtrays, malted milk balls, caramel corn, towels of every color andstyle, casual shoes, wooden bowls, and cooking utensils. Many of these items were stockpiled, sometimes for years, before they were used. His father was also a recreational shopper. He spent hours each Saturday shopping for tools and hardware. In most cases, these items were rarely, if ever, used.
Clearly, Mr. Friend’s parents were UAWs. He was well trained. But today he generates a much higher income than his parents ever earned. Why is he still a UAW? This income, in itself, is a result of parental guidance. His dad often told him to seek a job with high-income potential. To do so would enable Mr. Friend to buy the finer things in life. His father’s message was clear: To purchase a fine home, luxury automobiles, and expensive clothing, one has to earn a large income. Mr. Friend found that several areas of the sales profession had excellent income-producing opportunities. He would have to earn big to spend big. No mention was ever made of the value of putting money aside for investing. Income was designed to be spent. Credit was used heavily for major purchases.
Mr. Friend and his parents have never appreciated the benefits of accumulating wealth via investing. Mr. Friend told us repeatedly that “it’s hopeless.” He just does not have any money to invest! How is it that someone with an income six times the average for American households has no money to invest? Mr. Friend spends more annually for his children’s private school and college tuition than the average household earns in a year. He has an inventory of automobiles that is valued in excess of $130,000. He pays more than $12,000 each year for property taxes. His total annual mortgage payments are in excess of $30,000. Several of his suits cost $1,200 each.
But his insensitivity to the benefits of investing go beyond his need to consume. His parents had no understanding or appreciation of invested dollars. Nor does he. And his parents passed this lack of wisdom on to him.
Mr. Friend argues that his parents were people of modest means, people with no money to invest. Let’s examine this perception. His parents smoked three packs of cigarettes each day. How many packs did they consume during their adult lifetimes? There are 365 days in a year. So they consumed approximately 1,095 packs per year. They smoked for approximately forty-six years. So in forty-six years, they smoked 50,370 packs of cigarettes. How much did the couple pay for these cigarettes?
Approximately $33,190—more than the purchaseprice of their home! They never considered how much it cost to purchase cigarettes. They viewed such purchases as small expenses. But small expenses become big expenses over time. Small amounts invested periodically also become large investments over time.
What if the Friends had invested their cigarette money in the stock market (index fund) during their lifetimes? How much would it have been worth? Nearly $100,000. And what if they had used their cigarette money to purchase shares in a tobacco company? What if they had purchased, reinvested all dividends, and never sold shares in Philip Morris instead of smoking Philip Morris products for forty-six years? At the end of forty-six years, the couple would have had a tobacco portfolio worth over $2 million. But the couple, like their son, never imagined that “small change” could be transformed into significant wealth.
This change in behavior alone would have placed the Friends in the millionaire category. They would have been members of the PAW group, too, given their modest income. Perhaps they would have lived differently if someone had educated them about the mathematics of wealth appreciation.
No one told them about this phenomenon. So it is not surprising that they failed to educate their son about the benefits of investing. But they did tell him not to smoke. His dad told him, “Don’t ever put the first cigarette in your mouth. I’m hooked. There is nothing I can do to quit.” His son followed this advice.
#Lecture_series_based_on_book_the_Millionaire_next_door.
#First_generation_rich
#reference_country_and_money__AMERICA_&_American
Part (1/4)
Meet the Millionaire
“These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires—they don’t even have millionaire names. Where are the millionaires who look like millionaires?”.
The person who said this was a vice president of a trust department. He made these comments following a focus group interview and dinner that we hosted for ten first-generation millionaires. His view of millionaires is shared by most people who are not wealthy. They think millionaires own expensive clothes, watches, and other status artifacts.
We(researchers) have found this is not the case. As a matter of fact, our trust officer friend spends significantly more for his suits than the typical American millionaire. He also wears a $5,000 watch.
We know from our surveys that the majority of millionaires never spent even one-tenth of $5,000 for a watch. Our friend also drives a current-model imported luxury car. Most millionaires are not driving this year’s model. Only a minority drive a foreign motor vehicle. An even smaller minority drive foreign luxury cars. Our trust officer leases, while only a minority of millionaires ever lease their motor vehicles.
But ask the typical American adult this question: Who looks more like a millionaire? Would it be our friend, the trust officer, or one of the people who participated in our interview? We would wager that most people by a wide margin would pick the trust officer. But looks can be deceiving.
PORTRAIT OF A MILLIONAIRE.
♦ On average, their total annual realized income is less than 7 percent of our wealth. In other words, they live on less than 7 percent of their wealth.
♦ They live well below their means. They wear inexpensive suits and drive American-made cars. Only a minority of them drive the current-model-year automobile. Only a minority ever lease their motor vehicles.
♦ Most of their wives are planners and meticulous budgeters. In fact, only 18 percent of Millionaire couples disagreed with the statement “Charity begins at home.” Most of them will tell you that their wives are a lot more conservative with money than they are.
♦ They have a “go-to-hell fund.” In other words, They have accumulated enough wealth to live without working for ten or more years. Thus, those of them with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, They could live longer than that, since they save at least 15 percent of their earned income.
♦ As a group, they are fairly well educated. Only about one in five are not college graduates. Many of them hold advanced degrees. Eighteen percent have master’s degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.
♦ As a group, they believe that education is extremely important for themselves, their children, and their grandchildren. They spend heavily for the educations of their offspring.
♦ About two-thirds of them work between forty-five and fifty-five hours per week.
♦ They are fastidious investors. On average, they invest nearly 20 percent of their household realized income each year. Most of them invest at least 15 percent. Seventy-nine percent of them have at least one account with a brokerage company. But They make their own investment decisions.
♦ They hold nearly 20 percent of their household’s wealth in transaction securities such as publicly traded stocks and mutual funds. But they rarely sell their equity investments. They hold even more in their pension plans. On average, 21 percent of their household’s wealth is in their private businesses.
Millionaires and You
Who becomes wealthy?
Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life. This person owns a small factory, a chain of stores, or a service company or high income job.He has married once and remains married. He lives next door to people with a fraction of his wealth. Look at followings traits:
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.
8. He is a compulsive saver and investor.
Mainly, that building wealth takes discipline, sacrifice, and hard work. Do you really want to become financially independent? Are you and your family willing to reorient your lifestyle to achieve this goal? Many will likely conclude they are not. If you are willing to make the necessary trade-offs of your time, energy, and consumption habits, however, you can begin building wealth and achieving financial independence.
Part(2/4)
WEALTHY DEFINED
Ask the average American to define the term wealthy. Wealthy to them refers to people who have an abundance of material possessions. We(researchers) define wealthy differently. We do not define wealthy, affluent, or rich in terms of material possessions. Many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil/gas rights, or timber land. Conversely, those people whom we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.
THE NOMINAL DEFINITION OF WEALTHY
we define the threshold level of being wealthy as having a net worth of $1 million or more. (NPR 10 Crore or more).
A FOUNDATION FOR BUILDING WEALTH
It is unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles, and such. To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement.
What are three words that profile the affluent?
FRUGAL FRUGAL FRUGAL
Webster’s defines frugal as “behavior characterized by or reflecting economy in the use of resources.”
The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyperconsumption.
Being frugal is the cornerstone of wealth-building.
But the lavish lifestyle sells TV time and newspapers. All too often young people are indoctrinated with the belief that “those who have money spend lavishly” and “if you don’t show it, you don’t have it.”
Could you imagine the media hyping the frugal lifestyle of the typical American millionaire? What would the results be? Low TV ratings and lack of readership, because most people who build wealth in America are hard working, thrifty, and not at all glamorous. Wealth is rarely gained through the lottery, with a home run, or in quiz show fashion. But these are the rare jackpots that the press sensationalizes.
Many people who are not wealthy, know how to deal with increases in their realized income. They spend them! Their need for immediate gratification is great. To them, life is like a quiz show. Winners get quick cash and conspicuous gifts.
THE LIFESTYLE OF THE TYPICAL AMERICAN MILLIONAIRE
Traditional family values and lifestyle of hard work, discipline, sacrifice, thrift, and sound investment habits to reduce his spending in order to build wealth for the future.
What happens when you tell the average American adult that he needs to reduce his spending in order to build wealth for the future? He may perceive this as a threat to his way of life.
Here are some of questions asked to Jhonny ( a typical millionaire) about his purchasing habits.
“What’s the most you ever spent for a suit of clothing?”
Johnny closes his eyes for a moment. Obviously, he is deep in thought. Most people Expect him to say, “Somewhere between $1,000 and $6,000.” But research indicates that the expectations are wrong.
He said “The most I ever spent… the most I ever spent… including the suits I bought for myself and for my wife, June, and my sons, Buddy and Darryl, and my girls, Wyleen and Ginger …the most I ever spent was $399. Boy, I remember that it’s the most I ever spent. It was for a very special occasion—our twenty-fifth wedding anniversary party.”
According to survey, the typical American millionaire reported that he (she) never spent more than $399 for a suit of clothing for himself or for anyone else. Fifty percent or more of the millionaires surveyed paid $399 or less for the most expensive suit they ever purchased. Only about one in ten paid $1,000 or more; only about one in one hundred paid $2,800 or more. Conversely, about one in four millionaires paid $285 or less, and one in ten paid $195 or less for his (her) most expensive suit.
They are not interested in the fact that a suit with the same label was also worn by Dickens, de Gaulle, and Churchill. Nor do they care if your suits ever generate dividends or capital gains. But they can certainly ruin your investment portfolio of suits.
Then who purchases all those expensive suits? Our(researchers) survey has revealed an interesting relationship. For every millionaire who owns a $1,000 suit, there are at least six owners who have annual incomes in the $50,000 to $200,000 range but who are not millionaires. Their shopping habits certainly have something to do with the fact that they are not wealthy.
Who are these people?
Typically, they do not own their own businesses. They are more likely to be corporate middle managers (especially those who are part of a working couple), attorneys, sales and marketing professionals, and physicians.
THEN CERTAINLY FOOTWEAR
About half the millionaires surveyed reported that they had never spent $140 or more for a pair of shoes. One in four had never spent more than $100. Only about one in ten had spent over $300.
If not millionaires, then who is keeping the high-priced shoe manufacturers and dealers in business? Certainly some millionaires purchase expensive shoes. But for every millionaire in the “highest price paid” category of over $300, there are at least eight non-millionaires.
Note that only 1 percent of the millionaires in our survey paid $667 or more for a pair of shoes. Mr. King’s(a nonmillionaire) purchase of alligator shoes is rare even among millionaires. Nonetheless, the popular media enjoy touting abnormalities in buying behavior. As a consequence, 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.
Why does Johnny get ignored while Mr. King receives headlines? Because Johnny’s consumption habits are mundane. His rewards are more intangible than product-related: financial independence; discipline; and being an excellent family provider, a fine husband, and a father of well-disciplined children.
WRISTWATCH
Fully one-half of the millionaires surveyed never in their lives spent more than $235 for a wristwatch. About one in ten never paid more than $47, while about one in four spent $100 or less. Certainly some millionaires purchase expensive watches. But they are in the minority. Even among millionaires, only 25 percent of those surveyed paid $1,125 or more. About one in ten paid $3,800 or more. About one in one hundred paid $15,000 or more.
SO RARE THE JOHNNY
Why are so few people in America affluent? Even most households with six-figure (6 digit) annual incomes are not affluent. These people have a different orientation than does Johnny. They believe in spending tomorrow’s cash today. They are debt-prone and are on earn-and-consume treadmills. To many of them, those who do not display abundant material possessions are not successful. To them, nondisplay-oriented people like Johnny are their inferiors.
Part(3/4)
Is your spouse more frugal than you are?
PLAYING GREAT DEFENSE
The affluent tend to answer “yes” to three questions we include in our(researchers) surveys:
1. Were your parents very frugal?
2. Are you frugal?
3. Is your spouse more frugal than you are?
This last question is highly significant. Not only are the most prodigious accumulators of wealth frugal, their spouses tend to be even more frugal.
Most of these men play great offense in the game called income generation. Great offense in economic terms means that a household generates an income significantly higher than the norm.
Most of these households also play great defense; that is, they are frugal when it comes to spending for consumer goods and services. One frugal high-income producer within the married-couple category, however, does not automatically translate into a high level of net worth.
Something else must be present. A self-made millionaire stated it best when he told us:
“I can’t get my wife to spend any money!”
Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple cannot accumulate wealth if one of its members is a hyperconsumer. This is especially true when one or both are trying to build a successful business. Few people can sustain profligate spending habits and simultaneously build wealth.
HOW COME I M NOT WEALTHY?
Why aren’t you wealthy, you ask? Well, let’s examine your lifestyle. Is it one of great offense? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation? Be honest with yourself. Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires.
Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/outaccumulate those who outearn/have superior offenses.
“Their extraordinarily good offense compensates for a lack of defense and Vice-versa, in a game to Become affluent and stay affluent?”.
Income Against Affluent (Do all millionaires are high income Peoples ? No, read below)
The expectation is that the group would have an equally high concentration of high-income producers. Income is highly correlated with net worth; more than two-thirds of the millionaires in America have annual household incomes of $100,000 or more. In fact, this correlation exists for all major ancestry groups but one: the Scottish. This group has a much higher number of high-net worth households than can be explained by the presence of high-income-producing households alone. High-income-producing Scottish-ancestry households account for less than 2 percent of all high-income households in America. But remember that the Scottish ancestry group accounts for 9.3 percent of the millionaire households in America today. More than 60 percent of Scottish-ancestry millionaires have annual household incomes of less than $100,000. No other ancestry group has such a high concentration of millionaires from such a small concentration of high- income-producing households.
If income does not come near in explaining the affluence of the Scottish ancestry group in America, what factors do shed light on this phenomenon? There are several fundamental factors.
First, Scottish Americans tend to be frugal. Given a household’s income, there is a corresponding mathematical expectation of level of consumption. Members of this group do not fit such expectations. On average, they live well below the norm for people in various income categories. They often live in self-designed environments of relative scarcity. A household of Scottish ancestry with an annual income of $100,000 will often consume at a level typical for an American household with an annual income of $85,000. Being frugal allows them to save more and invest more than others in similar income groups. Thus the same $100,000 income-producing household of Scottish descentsaves and invests at a level comparable to the typical American household that annually earns nearly $150,000.
Charles Bobbins is a forty-one-year-old fireman. His wife is a secretary. They have a combined annual income of $55,000. According to our research findings, Mr. Bobbins should have a net worth of approximately $225,500. But he is worth much more than others in his income/age category. Mr. and Mrs. Bobbins have been able to accumulate an above-average amount of net worth. Thus, they apparently know how to live on a fireman’s and secretary’s income and still save and invest a good bit. They likely have a low-consumption lifestyle. And given this lifestyle, Mr. Bobbins could sustain himself and his family for ten years without working. Within their income and age categories, the Bobbinses are wealthy.
The Bobbinses are quite different from John J. Ashton, M.D., age fifty-six, who has an annual income of approximately $560,000. How much is Dr. Ashton worth? Is he wealthy? According to one definition, he is, since his net worth is $1.1 million. But he is not wealthy according to our other definition. Given his age and income, he should be worth more than $3 million.
With his high-consumption lifestyle, how long do you think Dr. Ashton could sustain himself and
his family if he were no longer employed? Perhaps for two, at most three, years.
The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.
We (Researchers) have discovered that several occupational groups contain large numbers of budgeters and planners.
Why are Mr. and Mrs. Rule millionaires today? Because Mrs. Rule plays tremendous defense! She is responsible for budgeting and spending for both her household and their business. Is anyone in your household responsible for budgeting? All too often the answer is “not really.” All too often people allow their income to define their budgets.
When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictable question: Why would someone who is a millionaire need to budget?
Our answer is always the same:
They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.
THE ANALOGY
Most people want to be physically fit. And the majority know what is required to achieve this. But despite that knowledge, most people never become well conditioned physically. Why not? Because they don’t have the discipline to just do it. They don’t budget their time to just do it. It is like becoming wealthy in America. Oh, you want to all right, but you play lousy financial defense. You don’t have the discipline to control your spending. You don’t take the time to budget or plan.
Note that under accumulators of wealth spend three times as much time exercising per month as they do planning their investment strategies.
Mrs. Rule is different. She’s like most millionaires. She’s disciplined. She takes time to plan and budget. This translates into wealth. Mrs. Rule’s household income varies from year to year. (It is typical to have ups and downs in their cash flow). Over the past five years her annual income averaged around $90,000. But her net worth keeps increasing. Today Mrs. Rule has a net worth of more than $2 million.
In our(researchers) survey, she answered “yes” to four questions about planning and budgeting.
QUESTION 1: DOES YOUR HOUSEHOLD OPERATE ON AN ANNUAL BUDGET?
QUESTION 2: DO YOU KNOW HOW MUCH YOUR FAMILY SPENDS EACH YEAR FOR FOOD, CLOTHING, AND SHELTER?
Almost two-thirds of the millionaires surveyed (62.4 percent) answered “yes” to this question. So did Mrs. Rule. But only about 35 percent of high-income-producing nonmillionaires answered “yes” to this question. Many of these high-income/low-net worth types have no idea how much they spend each year for such items as food consumed at home, food consumed away from home, beverages, birthday and holiday gifts (for each category of recipient), each category of clothing for each household member at each store, baby-sitters, day-care fees, line of credit use, charitable contributions, financial advice, club dues, motor vehicles and related expenses, tuition, vacations, heating and lighting, and insurance.
QUESTION 3: DO YOU HAVE A CLEARLY DEFINED SET OF DAILY, WEEKLY, MONTHLY, ANNUAL, AND LIFETIME GOALS?
The source of this question came from a decamillionaire whom we(researchers) interviewed a dozen years ago. He told us that he started a wholesale food business at the age of nineteen. He never finished formal high school but did eventually receive his high school equivalency diploma. We asked him to account for the fact that although he was a high school dropout, he had accumulated over $10 million. His response was as follows:
I have always been goal-oriented. I have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals, and lifetime goals. I even have goals to go to the bathroom. I always tell our young executives that they must have goals.
Her financial goal is to accumulate $5 million. Mrs. Rule knows how much she needs to set aside each year to attain her goals.
But is she happy? That’s a question very often asked of us regarding frugal millionaires. Will they then be happy? We don’t know, but we can tell you this:
Yes, she is happy.
Because one who will help them change their household environment from one of chaos and hyperconsumption to one of goal-oriented planning, budgeting, and controlling.
Financially independent people are happier than those in their same income/age cohort who are not financially secure.
Financially independent people seem to be better able to visualize the future benefits of defining their goals. Mrs. Rule, for instance, visualizes all her grandchildren graduating from college. She visualizes their success after college. She never sees herself being financially dependent on others, even if she is disabled in the future. Her goals are congruent with those of most millionaires in this regard.
QUESTION 4: DO YOU SPEND A LOT OF TIME PLANNING YOUR FINANCIAL FUTURE?
Although millionaires have much more experience in making investment decisions, they allocate significantly more hours than do nonmillionaires in an effort to become even better investors. That is one of the main reasons that millionaires remain wealthy.
Business owners like Mrs. Rule certainly have more freedom than people who are not self- employed. She can and does leverage her business knowledge with her personal investing habits. She can pick her area of business and the one she wants to study. Often employees don’t have this luxury.
But even among those who do have significant knowledge about excellent investment opportunities, many do not leverage this knowledge. Consider the following examples:
♦ A highly productive sales professional (we will call him Mr. Willis) had Wal-Mart as a client for more than ten years. All during this time, Wal-Mart was exploding in growth and value. How many shares of Wal-Mart did Mr. Willis, the six-figure-earning sales professional, ever purchase? Zero.
Yes, zero, even though he had considerable firsthand knowledge of his client’s success and an annual six-figure income. But he did purchase a foreign luxury car every two years during this time.
♦ A high-income-producing marketing manager, Mr. Petersen, was employed in the high-tech field. But he never invested a dollar in Microsoft or any other growth company. Never, in spite of having considerable knowledge about many of the firms in the technology industry.
♦ The owner of a printing business enjoyed having one of the leading beverage companies in America as a customer. The customer bought millions of dollars’ worth of printing from him annually. But how much money has the printer invested in his customer’s equity offerings? Zero.
In all three cases, the person makes a higher income than does Mrs. Rule. Yet none is a millionaire. In fact, Mr. Petersen, the marketing manager, has zero invested in stocks. He never invests any of his income. But he lives in a $400,000 home that is surrounded by others in the high-tech field who have big hats and bigger mortgages, but nocattle. Too many high-income/low-net worth types live from paycheck to paycheck, fearing a sudden downturn in our economy.
Part(4/4)
Fallacy of Rich
OUR FRIEND THE Under wealth Accumulator (UAW)
What motivates Theodore “Teddy” J. Friend? Why does he work so hard? Why is he driven to earn so much money? Why does he spend so much? Teddy will tell you it’s because he’s competitive. But so are almost all top-producing sales professionals. His competitiveness is not the most important reason for his behavior.
When Teddy was growing up, his family was among the poorest in a blue-collar community. His family’s small home was built from used lumber and similar discarded materials. Until Teddy was a freshman in high school, his father cut Teddy’s hair, which did save money, although, according to Teddy, most people could tell that his “head was worked on by an amateur.”
The public high school he attended attracted students from a wide variety of socioeconomic backgrounds. Many were from upscale homes. “Rich kids” were there in large enough numbers to fill the high school’s parking lot with their nice cars. These cars always amazed Mr. Friend. Throughout high school his family owned one automobile. It was a well-used Ford that his dad had bought when it was ten years old.
During his high school years, Mr. Friend made a promise to himself that someday he would be a lot better off than his parents. “Better off” in his mind meant having a nice home in an upscale neighborhood, fine clothes for everyone in his family, classy cars, club memberships, and items purchased in the best stores. Mr. Friend realized that “better off” could be achieved by finding a high- paying position and working very hard.
Never did Mr. Friend equate “better off” with accumulating wealth. Again, being “better off” meant displaying one’s high income via the conspicuous display of high-status artifacts. Teddy never gave much thought to the benefits of building an investment portfolio. To him, a high income was the way to overcome a feeling of social inferiority. A high income was the product of hard work. “Income in the form of capital gains” were foreign words to him.
Mr. Friend’s father and mother were dysfunctional when it came toputting money away for a rainy day. Their financial plan was very simple: They spent when they had money. They stopped spending when they ran short of money. If they needed something, such as a washing machine or a new roof, they saved for it. But they also bought many items with installment loans. They never owned any stocks or bonds. Never did Teddy’s parents set aside income for investment purposes. They did not understand or trust the stock market. The only real financial wealth the couple had was a small pension and the equity in their very modest home.
Today their son has a need to compensate for his “primitive blue-collar” background and his perceived educational deficiency. Mr. Friend never completed college. Even now he feels compelled to outperform all the college graduates against whom he competes. He will tell you that he enjoys dressing better, driving better, dwelling better, and, in general, living higher than all those “college kids” who operate within his territory.
Mr. Friend is the ultimate consumer. He has two boats, one jet ski, and six automobiles (two are leased; the others were purchased via credit). Interestingly, there are only three drivers in his household. He is a member of two country clubs and wears a watch that cost more than $5,000. He buys his clothes from the best stores. Mr. Friend also “owns” a vacation condo.
Last year Mr. Friend’s income was approximately $221,000. Given his age, forty-eight, what is his expected net worth? According to our wealth equation, his net worth should be $1,060,800 (expected wealth = one-tenth age x total annual income). What is his real net worth? Less than one-fourth of the expected figure.
How is it possible that Mr. Friend has an actual net worth that is less than one-fourth of the expected value? The answer lies in how Mr. Friend thinks. Wealth accumulation is not what motivates him. Interestingly, Mr. Friend firmly believes that if he were really wealthy he would not be a top- income generator. He has often stated that people who come from wealthy backgrounds have little motivation to excel in the workplace.
Mr. Friend has found a method to sustain and even enhance his drive to perform at high levels. He has found that fear is a great motivator. So he buys more and more via credit. By increasing the amount he owes, he correspondingly increases the accountant’s fear of default. In turn, this increasing level of debt-based fear encourages him to workharder and more aggressively. To him, a big home is a reminder of a big mortgage and the need to perform at a high level.
Mr. Friend is not a big spender across all categories of products and services. Ask him how much money he allocates for financial advice. In this category he is very price-sensitive. For example, his choice of an accountant was based almost exclusively on the accountant’s fees, not on his quality. Mr. Friend has always believed that the quality of service that accountants deliver is about the same; only their fees are different. That’s why he picked an accountant who has low fees.
In sharp contrast, most wealthy people feel that you get what you pay for in the realm of financial advice.
Mr. Friend spends a considerable amount of time working. Still, he constantly worries that he will lose his so-called competitive edge. He is concerned that his need to outperform the rich kids, the college graduates, will wane someday. Mr. Friend constantly reminds himself about his humble background and lack of that all-important college degree. He constantly punishes himself psychologically. In his eyes he is inferior in pedigree to those very confident college graduates against whom he competes. He often wonders how they can be so content, given their less-than-exceptional performance in the workplace.
Mr. Friend never really enjoys his life. He owns a lot of upscale things, yet he works so hard and for so many hours during a typical day that he has no time to enjoy them. He has no time for his family, either. He leaves his house each day before dawn and rarely returns home in time for dinner.
Would you like to be Mr. Friend? His lifestyle is appealing to many people. But if these people really understood Mr. Friend’s inner workings, they might evaluate him differently. Mr. Friend is possessed by possessions. He works for things. His motivation and his thoughts are focused on the symbols of economic success. He constantly needs to convince others of this success. Unhappily, he has never convinced himself. In essence, he works, he earns, and he sacrifices to impress others.
These factors underlie the thought processes of many under accumulators of wealth. More often than not, UAWs allow “significant others” to determine their financial lifestyle. Interestingly, these “significant others,” or reference groups, turn out to be more imagined than real. Are you motivated by “significant others”? Perhaps you should consider a different approach to life. Perhaps you should reorient yourself.
Are all high-income people who came from humble beginningsdestined to become UAWs? Will they all turn out to follow the ways of Mr. Friend? Absolutely not. There is a fundamental reason beyond Mr. Friend’s perceived social and educational deficiencies that explains why he became a UAW: His parents taught him the ways of the UAW. In spite of their modest income, his parents were not frugal. They spent nearly all their income. They were professionals in expending resources. Any pending increase in income was immediately earmarked for consumption. Even anticipated income tax refunds were allocated for consumption—long before the checks were received. Their consumer behavior had an impact on their son. They constantly sent him a message:
One earns to spend.
When you need to spend more, you need to earn more.
LIFE AMONG FRIENDS
How did Mr. Friend’s parents spend their money? He told us that throughout their marriage they ate a lot, smoked a lot, drank a lot, and shopped a lot. Their household was always overloaded with food. They stockpiled snack foods, prime meats, cold cuts, ice creams, and other desserts. Even breakfast was a feast. Bacon, sausage, home fries, eggs, English muffins, and Danish pastries were basics in the morning. Steaks and roasts were the preferred dinner offerings. The Friends never skipped a meal. Neighbors and relatives were frequent guests at the “Friends’ Restaurant,” as they referred to their home. Mr. Friend’s parents, between them, smoked about three packs of cigarettes a day. During a normal week they consumed two cases of beer. On holidays, consumption of food, tobacco, and alcohol greatly increased.
Shopping and consuming were the Friends’ main hobbies. More often than not, they shopped for fun, not necessity. On most Saturdays they would shop from the early morning until mid-afternoon. First they shopped for food. Then they spent countless hours shopping in discount stores. Mr. Friend pointed out that “most of the stuff they bought was junk.”
His mother was an especially aggressive discount store shopper. She had a strong proclivity for purchasing large quantities of throw rugs, ashtrays, malted milk balls, caramel corn, towels of every color andstyle, casual shoes, wooden bowls, and cooking utensils. Many of these items were stockpiled, sometimes for years, before they were used. His father was also a recreational shopper. He spent hours each Saturday shopping for tools and hardware. In most cases, these items were rarely, if ever, used.
Clearly, Mr. Friend’s parents were UAWs. He was well trained. But today he generates a much higher income than his parents ever earned. Why is he still a UAW? This income, in itself, is a result of parental guidance. His dad often told him to seek a job with high-income potential. To do so would enable Mr. Friend to buy the finer things in life. His father’s message was clear: To purchase a fine home, luxury automobiles, and expensive clothing, one has to earn a large income. Mr. Friend found that several areas of the sales profession had excellent income-producing opportunities. He would have to earn big to spend big. No mention was ever made of the value of putting money aside for investing. Income was designed to be spent. Credit was used heavily for major purchases.
Mr. Friend and his parents have never appreciated the benefits of accumulating wealth via investing. Mr. Friend told us repeatedly that “it’s hopeless.” He just does not have any money to invest! How is it that someone with an income six times the average for American households has no money to invest? Mr. Friend spends more annually for his children’s private school and college tuition than the average household earns in a year. He has an inventory of automobiles that is valued in excess of $130,000. He pays more than $12,000 each year for property taxes. His total annual mortgage payments are in excess of $30,000. Several of his suits cost $1,200 each.
But his insensitivity to the benefits of investing go beyond his need to consume. His parents had no understanding or appreciation of invested dollars. Nor does he. And his parents passed this lack of wisdom on to him.
Mr. Friend argues that his parents were people of modest means, people with no money to invest. Let’s examine this perception. His parents smoked three packs of cigarettes each day. How many packs did they consume during their adult lifetimes? There are 365 days in a year. So they consumed approximately 1,095 packs per year. They smoked for approximately forty-six years. So in forty-six years, they smoked 50,370 packs of cigarettes. How much did the couple pay for these cigarettes?
Approximately $33,190—more than the purchaseprice of their home! They never considered how much it cost to purchase cigarettes. They viewed such purchases as small expenses. But small expenses become big expenses over time. Small amounts invested periodically also become large investments over time.
What if the Friends had invested their cigarette money in the stock market (index fund) during their lifetimes? How much would it have been worth? Nearly $100,000. And what if they had used their cigarette money to purchase shares in a tobacco company? What if they had purchased, reinvested all dividends, and never sold shares in Philip Morris instead of smoking Philip Morris products for forty-six years? At the end of forty-six years, the couple would have had a tobacco portfolio worth over $2 million. But the couple, like their son, never imagined that “small change” could be transformed into significant wealth.
This change in behavior alone would have placed the Friends in the millionaire category. They would have been members of the PAW group, too, given their modest income. Perhaps they would have lived differently if someone had educated them about the mathematics of wealth appreciation.
No one told them about this phenomenon. So it is not surprising that they failed to educate their son about the benefits of investing. But they did tell him not to smoke. His dad told him, “Don’t ever put the first cigarette in your mouth. I’m hooked. There is nothing I can do to quit.” His son followed this advice.
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