To accumulate wealth, you should start by reading and studying the behaviors of people who have successfully accumulated wealth and achieved financial independence.
In the groundbreaking financial book, “The Millionaire Next Door: Surprising Secrets of America’s Wealthy”, written in 1996 by William Danko and Thomas Stanley, found that people who appear wealthy may not actually be wealthy.
Their findings reveal that people who appear wealthy tend to overspend or live paycheck to paycheck. They often overspend on symbols of wealth like luxury vehicles and large homes — but actually have modest or negative personal net worths. On the other hand, wealthy individuals tend to live modestly in middle-income communities, drive modest vehicles, and shop at Costco Warehouse.
Lessons Learned from “The Millionaire Next Door” are enlightening on how the wealthy actually spend and save. Instead of appearing to be wealthy, they tend to:
Understand that Income Does Not Equal Wealth
It is a fact that higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is not spent on discretionary things, but is saved and invested. On average, wealthy individuals invest nearly 20% of their income. And, it finds that those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley
Work with a Budget
The majority of wealthy individuals have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it. As the authors wrote, “It’s much easier to budget if you visualize the long-term benefits of this task.”
Manage their Spend
Nearly two-thirds of the wealthy can answer know how much their family spends each year for food, clothing, and shelter. In contrast, only 35% of high-income non-wealthy answered yes to this question. The wealthy manage and track their spending.
Have Defined Financial Goals
About two-thirds of wealthy have clearly defined short-, intermediate- and long-Term goals. Many of the wealthy are retired and have already reached their goal of financial independence.
Dedicate Time To Financial Planning and Education
Creating a budget, goal setting and financial planning all take time, but the wealthy were willing to spend it. Danko and Stanley found that people they labeled “prodigious accumulators of wealth” (PAW) spend many hours per month planning their investments. In fact, they found “a strong positive correlation” between investment planning and wealth accumulation. Each week, each month, each year, the wealthy plan their investments.
Buy and Hold Smaller Homes
Your purchase of a home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of the wealthy have lived in the same house for more than 20 years.
Stay Married
The majority of wealthy people are married and stay married to the same person. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced. Conversely, it’s important to partner with someone who possesses similar healthy financial behavior and habits.
Buy and Hold Pre-Owned Vehicle
The majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.
Live Happier Lives
Bottomline, living below your means is the one sure way to accumulate wealth and to live happier. Since, there exist a peace of mind living below your means and saving money. Danko and Stanley’s research indicates that, “financially independent people are happier than those in their same income/age cohort who are not financially secure.”
Essentially, when it comes to financial security and retirement planning, adopting the lifestyle of the wealthy means you can save more toward your financial goals and destination. That’s a formula that can help anyone to accumulate wealth and achieve financial independence.
- Thomas J. Stanley, and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Paperback, November 16, 2010
- https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/