Saturday, August 13, 2011
The book of the week was The Millionaire Mind by Thomas J. Stanley. It is truly a terrific book, giving a real world look into the lifestyles of the average millionaire. It is extremely detailed, diving into everything from living conditions to spouse attributes. However, I am going to talk about a unifying theme in the book that separates real millionaires from the people that act in ways we expect millionaires to act. So let me back up... In my post over The Millionaire Nextdoor also by Stanley, I explained who the average millionaire really is:
Some Shocking Statistics about these Millionaires:
-The average taxable income for them is $131,000
-They live on less than 7 percent of their wealth
-Many of their occupations could be classified as dull-normal such as: welding contractor, auctioneer, mobile-home owner, paving contractor, coin and stamp dealer
-They invest on average nearly 20% of their household income
-Most of them are homeowners (97 percent) and their average home value is $320,000
-80% of millionaires today are first generation millionaires
That last statistic was shocking to me. There is a huge misconception in society about the wealthy. The media portrays the wealthy as a legacy of the rich, one generation just passes it on to the next and the idea of getting there is represented as just a pipe-dream. The fact that 80% of the millionaires surveyed were first generation millionaires should really open someone's eyes to the possibility of being a millionaire an accessible dream. The other thing the media skews about the wealthy is the living habits. They show millionaires spending money like it's going out of style. They have great big mansions, fancy cars, and more toys than any adult really needs. Real millionaires don't spend like this. The media loves to cover the abnormal... that is why they cover crime, lottery winners, celebrities and so on and so forth. This book does a great job of laying out what a T.V. show about the average millionaire would look like. Just think of it... a man with a slightly above average career, diligently focuses on his finance and investing habits, living below his means, and double checking his budgets before he spends even a $500 on a new television. Not the most interesting T.V. show, however, that is what that average millionaire does.
No matter how much money you make there is one golden rule to accumulating wealth... ready for it?... Live below you means! If you have $5000 coming in each month after taxes then do your best to live on $4000 and then invest the rest. This is the only sure fire "get rich quick scheme"... and it really works. Throughout this blog I give tips on what may make a good investment and why, but you will surely fail investing and accumulating wealth if you do not have the first step completed... live below you means. The average millionaire spends over twice as much time budgeting and analyzing their own spending habits than the average non-millionaire. So focus on not only what money is coming in, but also pay just as close attention, if not more, on the money going out.
Being frugal pays big... A lot of these millionaires are just your average blue-collar entrepreneurial Americans and the way they made it to financial freedom is through frugality. They spend much less on their cars than non-millionaires... in fact the average millionaire buys 3 year old cars. At that point they have a lot of the first 30k miles bugs worked out and they still ride like a new car, but at 75% off the original price. There is no reason to finance out your life... Getting over your head in debt just amounts to unneeded stress and a bunch of "in-the-moment" toys. You can only keep up with the Jones' so long before you realize you are 50 years old with no retirement and just lots of cars, toys, and a big house with no equity. I don't mean to be too brash, but I want everyone to understand the importance of living below/within your means. The alternative is living well off with equity in several properties, a couple reliable cars, travel the world retire early, have the ability to teach financial discipline to your children and live without a lot of unneeded stress!
Now I want to add to these ideas. In The Millionaire Mind I learned the difference between being Income Statement focused and Balance Sheet focused. Both are elements of an individual's financial statement, but when it comes to the average millionaire, one of them is much more important than the other. People that act like they are rich are many times Income Statement focused. They make good money and they spend it because the Income Statement says they have it coming in. They buy elaborate everything and oddly live paycheck to paycheck. However, a Balance Sheet focused individual is focused on the bottom line. After you subtract your liabilities from your assets, what is left? They are focused on this number and are focused on increasing it. Each month, the Balance Sheet focused individual is making this number higher and higher and eventually becomes a millionaire. No quick get-rich fix here. It takes time and it takes will-power. You don't go out and buy a jet-ski every time you get a paycheck. You want a jet-ski? Go home and crunch some numbers... map out the game plan to get that jet-ski and adjust your individual budgets to make it happen. Is the idea of giving up X, Y, or Z worth a jet-ski? If not, you don't buy it!
People are dumb with money. Well, I should say Average People are dumb with money. If you are brave enough to be reading this blog, you are clearly not average. The next non-average thing you need to do is follow my advice. Be Balance Sheet focused, not Income Statement. Who cares if you make $200,000 a year if you flush it down the toilet each month. Be smart and save money.
It was a excellent book with lots and lots of insightful information. If you are more curious about the average millionaire's lifestyle, pick up this book. If you have any questions don't hesitate to ask!