If you’re wondering how to become wealthy or to preserve the wealth you have, the logical thing to do would be to ask someone who is wealthy. That’s what researchers Thomas Stanley and William Banko did.
They surveyed over 1,000 millionaires about their attitudes and behaviors regarding wealth-related issues. The results were rather surprising. Most wealthy individuals didn’t amass their fortune through inheritance, or luck, or a revolutionary business idea.
Instead, most wealthy individuals attributed their financial success to a set of simple habits, which Stanley and Banko identified in their classic personal finance book, The Millionaire Next Door.
In reality, your average millionaire isn’t what you see on TV; they’re more like your average Joe. Based on the findings of Stanley and Banko in their book, we highlight the millionaire habits that anyone can apply to their own lives. They are a good general guide for how to become wealthy – and stay that way.
1. They budget and live below their means
Some believe the definition of wealth is having so much money you don’t know what to do with it, that you can spend carelessly without worry. Wealthy people actually know exactly what they’re doing with their money. Two-thirds of millionaires follow a budget, according to Stanley and Banko.
They are adamant about controlling expenses and living below their means. Because the more you spend, the more income you realize and the more taxes you have to pay. Money left over from expenses goes to two things: saving and investing.
This habit is reflected in the type of home and neighborhood millionaires choose to live in. The average home value of millionaires surveyed was actually less than $300,000. They are aware of how much home they can realistically afford based on their incomes as well as the potential cost of the lifestyle residents would be expected to live in particular neighborhoods.
2. They value financial independence over displays of high social status
Fast cars. Mansions. Yachts. These are things we like to associate with the millionaire lifestyle. But it’s just a common misconception. Wealthy people dream about financial independence, not caviar.
Consider that Stanley and Banko found that the average amount millionaires spent on a haircut was $18. That Ford was the most popular car brand, and less than a quarter owned a new car. They’re four times more likely to shop at Sears than Brooks Brothers. That they opt to wear Timex and Seiko watches, not Rolex.
Here’s what one real millionaire looks like:
That’s Ron Read, a Vermont gas station attendant and janitor. It was discovered that he had amassed an $8 million fortune after he passed away in 2014 and bequeathed $6 million to his local library and hospital. Certainly, this is an extreme example of someone living frugally in order to maintain his financial independence.
However, it makes an important point. It’s difficult to build or preserve wealth if you intend to live a lifestyle that is counter to that goal.
3. They spend time on financial planning and hire an adviser
As they say, time is money. Perhaps then, it’s not surprising that the wealthy spend twice the number of hours on financial planning and less time worrying about their financial well-being than under-accumulators.
With a financial plan, you’ll know just what smart money moves you need to make. That you should start saving as early as possible to get the most from compounding. That you should save at least enough in your 401(k) to earn the full employer’s match, because the wealthy don’t leave free money on the table. That increasing your savings is the surest way to improve your investment results. And that you need an emergency fund for those rainy days.
A financial adviser is who can help you create a personalized financial plan, put those decisions into action and stay on track. No matter your current circumstances, an adviser can help in almost every area of your finances.
4. They make financial smarts a family affair
An interesting habit uncovered by Stanley and Banko is a commitment toward raising self-sufficient children. There are two very good reasons.
For one, providing financial assistance to an adult child often does more harm than good. The more money adult children receive, the less money they accumulate. Whereas, those who receive less financial help from their parents tend to build more wealth. Giving encourages consumption rather than saving or investing. Children who consistently get money from their parents struggle to distinguish their wealth from the wealth of their parents. They are more dependent on credit, and they invest much less than those who do receive financial support from mom and dad.
Secondly, supporting an adult child adversely affects your own wealth. The cost just to raise a child from birth to an 18-year-old adult is $245,340, according to the latest data from the U.S. Department of Agriculture. Those who continue to provide financial support into adulthood often take on additional debt to do so and save less for retirement.
Putting it all together
Those who’ve figured out how to become wealthy know the road to wealth isn’t an exclusive one. The necessary habits are pretty common and easy for anyone to follow. The hard part for many of us is putting them into practice.
Those who do are bound to reach financial independence. Ultimately, building wealth and reaching your financial goals, such as retirement, is achieved over time and dollar by dollar.
Speak with an Advance Capital adviser who can help create a comprehensive financial plan for all your financial goals – no cost, no obligation. Fill out the contact form or call 800-345-4783.