In 1996, Thomas Stanley and William Danko published a revealing little book called “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.” Though Stanley and Danko could scarcely have imagined it at the time, the book has become a personal finance classic, selling more than three million copies.
The book is a compilation of research the authors made into the financial habits of Americans with net worth greater than $1 million. One of the most interesting surprises, and the basis of the book’s title, was that millionaires were not typically ostentatious snobs living in upscale neighborhoods. In fact, the authors found that those neighborhoods had fewer wealthy households per capita than neighborhoods that were more blue-collar and working class. Prestigious degrees and high pay, it turned out, had little to do with wealth creation. Much more important were a family’s saving and spending habits.
I have found similar dynamics at play in the lives of wealthy families I work with. While there are a lot of factors that contribute to becoming financially independent, here are three principles that are guaranteed to help you get there. Some may consider them old-fashioned. I like to think of them as tried and true.
1. Spend less than you earn. It should be pretty obvious that those who spend more than they earn will have a hard time increasing their net worth. Still, some people insist on pushing against this idea. What about their friend who made a killing in a tech stock? He never worried about saving anything and he did okay. People with that mindset remind me of the taxi driver I met thirty years ago in New York City. As we drove from La Guardia to my hotel near Wall Street he told me about his retirement plan. He said he took $20 bucks from every paycheck and bought a lottery ticket. He was sure he would win eventually. I wonder how that plan worked out for him.
2. Live frugally and avoid the luxury lifestyle. Most luxury items are depreciating assets. Every day you own that luxury car, a small portion of your wealth evaporates. The same thing happens with most other consumer goods. And the more rapidly you replace consumer goods, the more depreciation gnaws away at your wealth. There is a lot of wisdom in the old saying: “Use it up, wear it out, make it do or do without.”
3. Pay yourself first by investing in your future. This may require some near-term sacrifice, but the long-term benefits are worth it.
Participate in your company’s retirement savings plan—especially to the degree your company matches your contribution. Making the most of your company’s match is the only opportunity I know of to get a guaranteed 100 percent return on your investment. If you contribute $500 every month into a retirement plan earning 7.75% percent, your account will grow to $1 million after 30 years. With a company match, you can get there in half the time.
In addition to retirement savings, put away money for a rainy day. Your rainy day fund will keep you moving forward when life’s inevitable challenges arise. As you save, keep your portfolio diversified and avoid the temptation to speculate on hot tips from well-meaning friends.
Finally, if you own a home, maintain it properly. A well-maintained home can be a great foundation for your financial future. If you don’t own a home, look for the opportunity to buy one you can afford.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.