In the book “The Millionaire Next Door,” authors Thomas Stanley and William Danko interviewed five hundred  millionaires to get a realistic profile of the American millionaire.  Their findings surprised them as it challenged the typical images and expectations we usually have about this group of people.

Going against expectations, the majority of those millionaires did not look like “millionaires.”  They didn’t wear expensive watches. Neither did they drive flashy cars or even new model cars.  They did not live in upscale neighborhoods.  They just looked like ordinary people.  Even more surprisingly, their annual incomes were not that especially high.  But they saved enough of it to accumulate wealth.

millionaire lifestyle

The book concludes that the typical American can actually become a millionaire if only he does what this group of people do.

So what do they do?  What can we do to become like them?

One significant, common characteristic of these millionaires is that they spend much less than they earn.  In other words, they are frugal and live well below their means.  For example, the millionaire household that earns an income of $150,000 a year would only spend as much as the typical household in the $85,000 income range.

Here is where a lot of the confusion about wealth takes place.  People tend to assume that high income earners – athletes, actors, stock brokers, doctors – are wealthy. But there is a big difference between income and wealth.  Income is what you receive in your paycheck.  Wealth is what’s left of your paycheck after deducting your costs of living and purchases.  This is why a store clerk can be more wealthy than a highly paid actor.

Nicholas Cage for instance, is a highly paid American actor famous especially in the 1990s for films such as Conair and National Treasure. He earned $150 million USD from 1996 through 2011. In the end he filed for bankruptcy while still owing the IRS $13 million USD .  When the receivers went through his list of “assets” they found outrageous stuff like albino king cobras and a dinosaur skull which he bought for $300,000 USD. Cage later blamed and sued his accountant for the financial mess he was in.  His T-rex skull was in the news recently when investigators identified it as a stolen dinosaur fossil from Mongolia.  Reports state that Cage was cooperative and handed the skull back to the authorities.  I suppose he would be happy about that news since he can sue the museum that sold him the skull for the cost he incurred plus damages. He would be in far better company with cash than with a dinosaur skull these days.

Getting back to the point of this post, you and I, or any store clerk, if we only had one dollar left in our pocket after accounting for all our debt and expenses, would still be “wealthier” than Nicholas Cage.  Cage may still make more than we do when he makes appearances or movies.  But that’s the difference between income and wealth.

What does it mean to be frugal?  Frugality is the opposite of wastefulness.  If you are very economical with the use of your available resources, then you are frugal.  Based on the survey of Stanley and Danko, the typical American millionaire is of all things that can describe him:  frugal, frugal and frugal.  That’s how he built his wealth.  His neighbors think of him as an unexceptional member of the middle class because of his standard of living. The most he’s ever spent for a suit is $399 USD. In contrast, the $1,000 USD suits are being bought by people who have less than $1 million in net worth.  These are usually corporate middle managers, sales people and others who do not have their own businesses.

 

As for shoes, half of the millionaires they surveyed had never spent more than $140 for a pair. The same case goes for wristwatches. Half of the millionaires in the survey had never spent more than $235 USD for a wristwatch.

Other facts gathered about this group of millionaires was that the husbands had wives who were more frugal than they were.  The majority had lived with that one wife for their whole married life. (Divorce can severely damage a person’s net worth).  They also had clean titles to their homes, free of any mortgage.

Although frugality is just one aspect of a millionaire’s character and strategy for wealth building, it is a cornerstone trait. Making smart investments are also another means of increasing wealth.  However, if you have not been able to save anything out of your income, you will also have nothing to invest.

Frugality isn’t a trait that an individual would typically flaunt.  We tend to view it is being  a“cheapskate.”  However, this may also well be the reason why not everyone has a million dollars in his bank account.The usual mindset flaunts “wealth” in the form of nice, fashionable clothes, jewelry, cars etc.  But none of these are really assets.  They are not actually wealth.  They are status symbols, which, ironically, can be very deceiving as to the real wealth status of the person flaunting them.

Instead of “investing” in status symbols, a person who wants to become a millionaire should instead save as much as he can out of his income, cutting out unnecessary expenditures, and “spend” it on real investments that appreciate in value or earn a passive income over time. This can be in the form of real property, stocks or businesses.  There are a lot of ways to invest and grow your money, but first you must be able to save it out of what you earn.